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Large-cap Mutual Funds - Definition and Benefits
Many of us agree that investment in mutual funds is the most dangerous alternative to investing our hard-earned money. In a safe avenue, we always want to park our funds so we don't lose our capital and earn a good income. But do you know that mutual funds are also one of the best ways to invest and help generate big profits over time? If you haven't heard of it, something very important would be lacking.
What we need to know about is the large-cap fund, a class of equity mutual funds. Let's know here how safe and profitable it is to invest in large-cap mutual funds in India.
What is a large-cap fund?
The large-cap mutual fund is an investment vehicle that allows investors to make equity investments to gain capital appreciation. It belongs to the class of "Equity Mutual Funds" and has the primary objective of offering a period for capital growth and higher returns.
The main feature that distinguishes Large-caps from other alternatives includes the investments it makes in well-established and large-cap companies. The chances of growing the capital are very high as the funds are being put into big companies.
Big businesses have, as we know, already reached their top levels, so investing in them is truly beneficial for regular income gain. Through investing the money in a large number of companies' high-ranking equity shares, these funds aim to provide the investors with superior benefits.
Benefits of Large-cap Mutual Funds
StabilityThe large-cap mutual funds provide the investors with stable returns to help them grow substantially in their capital invested. The stocks they invest in performance consistently and market movements do not fluctuate them. Large-cap companies' stocks tend to yield stable dividend returns and help appreciate the value of investors.
Capital GrowthAs investments in large-cap funds are made in large-scale corporate equity stocks and shares, they tend to generate massive capital growth. To earn money, bonds and stocks are considered the best investments, and the investments made in the Large-caps provide the same.
SecurityThe stock market has a major impact on investment values. Market volatility tends to fluctuate the NAV of mutual fund plans, further reducing revenue or earnings. As investments are made in highly affluent and well-established companies, the large-cap equity mutual funds provide security to the funds.
DiversificationThe Large-caps provide the benefit of reducing risk factors by helping to diversify the investments across different sectors. The earnings are increased with this, and the risk is greatly minimized.
Things to consider before investing in Large-cap Funds
RiskWhile moderately, large-cap equity funds are subject to market risk. As compared to small-cap/mid-cap investments, the Net Asset Value (NAV) is not actively fluctuating due to benchmark ups and downs. These funds provide your investment portfolio with stability, and you might think about aligning the core of your investment portfolio with them. During a market boom, however, under-performance becomes the price of out-performance during a recession.
ReturnDo not expect the large-cap equity funds to behave erratically, as these have many years of history showing strong performance in both low and high market levels. There will be less unpredictable returns from these investments, which should be the draw when investing in them. Do not feel let down if these funds do not generate high returns even when the market is at its peak.
CostLarge-cap equity funds charge a fee to cover the expense ratio of your portfolio. This acts as a percentage of the average asset under management (AUM), based on the fund's operating performance. SEBI has set the upper expenditure ratio at 2.50 percent. Taking into account the relatively lower returns provided by these funds compared to small-cap/mid-cap equity funds, a fund with a lower expense ratio and a long-term holding period will help to recover the money lost by underperformance.
DurationLarge-cap equity funds are appropriate for people with a long-term investment horizon. Usually, the fund experiences a lot of underperformance during the slump period, which is more than seven years on average to yield returns in the range of 10%-12%. Those who choose these funds must be prepared to stick around for that period at least so that the fund can realize its full potential.
Financial objectivesLarge-cap equity funds are suitable for an investor in search of a reasonable risk level. During the slump, these funds have steady returns and track the loss of fund value. These funds can be used to accumulate wealth for retirement planning. Budding investors who seek exposure in equity markets but are cautious about the risks involved can build their portfolio around these funds. Investors should look at these funds as perfect investments with ease of investing and favorable tax treatment.
TaxationYou receive capital gains if you sell units of large-cap equity funds. These capital gains in your hands are taxable. The tax rate depends on how long you have been invested in equity funds; this is called the holding period.
You can, therefore, recognize that the large-cap mutual funds are very helpful in achieving the investors' long-term investment goals. You can safely make huge profits and create wealth for your future by investing in them.