What are large cap mutual funds

Large cap mutual funds are equity mutual funds which invest in shares of large cap companies across different sectors. Large cap mutual funds invest across companies in different sectors with a view to diversify company specific risk and sector risks. Large companies are perceived to be less risky than midcap and small cap companies. Therefore, large cap mutual funds are suitable for investors who do not have high appetite for volatility.

Companies which have a market capitalization exceeding Rs 10,000 Crores are known as large cap companies. These are well known companies with a fairly long history. These companies command a high percentage of the market share in their respective industry sectors. The largest of large cap companies are known as bluechip companies (stocks). They are called bluechip companies, because they enjoy the public’s confidence due to their strong long term track record. In India, the companies which form part of the BSE - Sensex are usually considered to be the bluechip companies.

Given their large size, investors believe that these companies are better placed to survive downturns in the economy compared to smaller companies; as a result these companies are perceived to be less risky and investors are ready to pay a premium for their shares. Since large cap companies are often richly valued upside potential in terms of valuations can often be limited compared to midcap companies. However, large cap stocks or mutual funds can give more stable returns compared to midcap stocks or funds.

Large cap mutual funds usually invest in companies which are included in the Nifty 50, BSE – 100 or BSE - 200. Some large cap mutual funds have concentrated portfolios, i.e. they invest in a limited number of stocks (usually 25 to 30 stocks). These mutual funds are called focused funds, e.g. Axis Focus 25 Fund, DSP Black Rock Focus 25 Fund, ICICI Prudential Focused Bluechip Equity fund etc. The company concentration risk of focused large cap funds are higher than that of more diversified large cap funds, but these funds can give excellent returns. However, investors who are not comfortable with incremental risks (related to company concentration), they should invest in more diversified large cap equity mutual funds.

Top performing large cap mutual funds have excellent track record of beating their benchmark indices like Nifty, BSE-100 or BSE-200. Investors need to have a sufficiently long investment horizon, at least three years or longer, when they are investing in large cap mutual funds. These funds tend to suffer in stock market corrections which are largely driven by Foreign Institutional Investor outflows from the Indian stock market, since Foreign Institutional Investors invest primarily in large cap stocks. But given the fundamental strength and growth potential of the Indian economy, foreign institutional investors consider Indian large cap stocks among the most attractive in the emerging market basket. Corrections in large cap mutual funds are usually temporary and over a sufficiently long investment horizon these funds can give good returns to investors.

Large cap mutual funds are suitable for new investors or investors who do not have a high appetite for volatility or investors want more stability in their portfolio. Investors can invest in large cap mutual funds either in lump sum or through systematic investment plan (SIP). Systematic Investment Plans are more suitable for salaried investors because they can invest in a disciplined way from their regular monthly savings instead of waiting to accumulate a lump sum amount.

Read What is Mutual Fund SIP and its benefits

Through Systematic Investment Plans, investors can also take advantage of stock market volatility through rupee cost averaging. Rupee cost averaging along with the power of compounding can give excellent returns to investors in the long term. However, in addition to systematic investment plans, if investors have lump sum funds available, they can tactically take advantage of market corrections to increase the asset allocation of equity in their overall investment portfolio by investing in large cap mutual funds.

Did you know which are the top performing large cap mutual funds in India