Large cap funds may provide better stability

Historically, large cap funds have provided relatively better stability to the portfolio during volatile market conditions as compared to mid or small cap funds.
Large cap funds may provide better stability

The Securities and Exchange Board of India (SEBI) in October 2017 defined a large cap fund as an open-ended equity-oriented mutual fund scheme that invests at least 80% of its under management (AUM) in large cap stocks. SEBI further defines a large-cap company as those listed companies which are ranked from 1st to 100th company in the Indian stock exchanges in the terms of market capitalisation.

Market capitalisation is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. Every quarter, Association of Mutual Funds in India (AMFI) publishes a list of the top 100 companies by market cap. Fund managers usually follow this list when making investments in large-cap stocks.

Historically, large cap funds have provided relatively better stability to the portfolio during volatile market conditions as compared to mid or small cap funds. Since its component, large-cap companies are relatively well-established and of reasonable size, are presumed to be safer. Conversely though, on the upside, it may not offer the same growth opportunities as compared to a small or mid-cap fund.

Since large-cap funds qualify as equity assets, any sale made within a year from the date of purchase is liable for Short Term Capital Gain (STCG) and attracts 15% tax. For any sale made after the investment has completed a year, Long Term Capital Gains (LTCG) tax is applicable at 10% on capital gains over R1 lakh.

Those investing in large cap funds must do so knowing that the underlying asset is equity with all its attendant risks. Yet, investing in large-cap funds is often used as a core long-term investment strategy as it is perceived to be less risky than mid-cap, small-cap, multi-cap and flexi-cap funds.

Yet, it would be prudent to note that it is less risky only when compared to small cap and mid-cap mutual funds. No equity investment is completely risk-free. Also, since risk & returns are directly related, the returns too are lesser when compared o small-cap and mid-cap funds in a market that is trending upwards.

It is thus a natural corollary that since it is a pure equity fund, the investment should ideally be for a long period to generate better returns.

While there may be select periods where the near-term returns are superior to the long-term returns, more often than not, and particularly since the underlying asset is equity, the long-term returns of a large cap fund outscore its near-term returns.

In next fortnight’s column, we shall turn the spotlight on some of the large cap funds, their holdings and their investments.

Ashok Kumar

Head of LKW-India.

He can be reached at ceolotus@hotmail.com

(Views expressed here are personal)

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