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Investing in the share market is a game of risk and return, the higher the risk you take, the higher the return can be expected. But many times, as an investor, one may want to avoid taking too much risk, and such investors are known as risk-averse investors. The best investment option for such investors is mutual funds, and an even better one is large-cap mutual funds. The reason will be clear as you keep reading further.
To begin with, let's first understand what mutual funds are?
We have all seen all those mutual fund investment advertisem*nts which end by saying that it's the right place to invest in. Why do they say so?
Well, mutual funds are considered the best place to invest as there are fewer risks and periodic returns.
All one needs to do is find a mutual fund investing institution and give them some money. Since the institutions are highly regulated, they will take good care of that money by investing in good places and getting you the best return opportunities.
So, coming back to our first question: what are large-cap mutual funds?
Large Cap Mutual Funds
The term "large cap" is short for large capitalization. Large capitalization means the firms that have a High market capitalization. For example, Reliance Industry, Tata Consultancy Services, Infosys, Hindustan Unilever, etc. They have a big part to play in the movement of the stock market, and at times of market volatility, these large-cap companies don't tend to get much affected.
From this, we can say that the shares of large-cap funds are less riskylong-term investments. Now consider this, an investment that is a mutual fund and also a large-cap! Wouldn't it be the ultimate investment option for any risk-averse investor?
The best characteristic of large-cap mutual funds is that they are less risky compared to small-cap and mid-cap, and also provide regular returns. Some of the best large-cap mutual funds are:
- Axis Bluechip Fund.
- SBI Bluechip Fund.
- Kotak Bluechip Fund.
- HDFC Index Fund (Sensex Plan).
- Mirae Asset Large Cap Fund.
*Disclaimer: It is always advisable to do your own research before investing. Mutual Fund investments are subject to market risks; one should always read all scheme-related documents carefully.
Large-cap mutual funds are perfect for:
As stated above, since these mutual funds are less risky and provide regular returns, it is best for risk-averse investors. It is also perfect for beginners who are new to market investments. Since it's a mutual fund, you will not have to worry about managing the stock because that will be done by professional fund managers. And in terms of risk and return, large-cap stocks are safer.
One thing that investors should keep in mind is that these funds do provide consistent returns, but they do not give higher returns when the market performs well. So expect consistent returns without any ups and downs.
Merits and Demerits
The major merit/advantage of large-cap mutual funds is that they are less risky and provide good returns. It is considered as best for beginners and risk-averse investors and also does not require any managing on a personal level.
But there is also a disadvantage attached to large-cap mutual funds.
Large-cap mutual funds give lesser returns if compared to mid-cap and small-cap stocks. Under financial explanation, this disadvantage is justified because the other two caps are riskier; thus, they provide higher returns to compensate the investors better.
If this disadvantage does not bother you as an investor, then large-cap mutual funds can be a very goodinvestment optionto add to your portfolio.
Factors to be considered before investing
Large-cap mutual funds do their part by giving regular returns at lesser risk, but as investors, some work needs to be done before investing in such funds. Once these factors are considered, the investor will be able to find the perfect investment for themselves.
These factors are as follows:
Investment needs:
The first thing to consider is the personal needs and expectations from the investment. Liquidity needs, income needs, risk tolerance, etc. should be considered before making the decision.
Investment horizon:
The general investment horizon for large-cap mutual funds is 3 to 5 years. So investors who are looking for long-term investments should be comfortable with putting their money in these funds for this duration.
Past performance:
To evaluate any asset or investment performance, the best way is to check its past performance. The same goes for large-cap mutual funds. It is important to check if the funds' return generation has been consistent through different market cycles.
Expense ratio:
Theexpense ratiohere refers to expenses such as brokerage fees, the commission charged by a mutual fund institution, and the return generated from the investment. A lower expense ratio means more return for the investors. So it is best to check the fee structure, returns, NAV, and other fees.
Performance of fund managers:
Since fund managers are the ones who manage your money, make sure to check their experience in the field of fund management. An experienced manager will be able to invest in the right places to get a desirable return.
Taxation:
Returns from large-cap mutual funds are treated as capital gains, and tax is charged on them. Just like any other equity asset treatment, STCG has a 15% tax, and LTCG will have a 10% tax charge. Short Term Capital Gain (STCG) is the capital gain earned on an investment horizon of up to 1 year. Long Term Capital Gain (LTCG) is the gain on investment of more than 1 year and amounts to more than Rs. 1 lakh.
Ways to evaluate Large-cap Mutual Funds
If the investor wants to evaluate the funds themselves before investing just to make sure that their money is invested in the right spot, the following ratios can be of help:
Beta:
Beta is a Greek term that is used in finance as a measure of the fund's volatility or sensitivity to the market benchmark.
Beta = 1 | The fund is as volatile as the fund benchmark |
Beta >1 | The fund is more sensitive to the market than the benchmark. |
Beta <1 | The fund is less volatile than the benchmark. |
Standard deviation:
Statistically, standard deviation means the dispersion of data from its average. In financial terms, the standard deviation is a measure of risk. Standard deviation is calculated as the dispersion of the actual return from its annualrate of return.
Standard deviation is high | More risky or volatile fund |
Standard deviation is low | Less risky or volatile fund |
Sharpe ratio:
It is a very good measure to check if a proper return is generated for the risk taken. It is calculated as:
Sharpe ratio = (Portfolio Return- Risk-free Rate)/Standard Deviation of the Portfolio Return
The formula itself concludes that the higher the Sharpe ratio, the better the investment option.
Conclusion
Any kind of market investment is riskier irrespective of how much it promises not to be, and this was proved by the2008 crisis.
Even with mutual funds, a disclaimer is always given that mutual funds are all subject to market risk, which is true, but with the proper management, the right return can be achieved for this risk.
In the end, in order to make the right investment choices and generate good returns, one must act as a responsible investor by doing good, extensive research on his part and evaluating the funds' right potential.
