By Hemant Sood
The financial goals of Indian households have changed throughout the past decade, and so have the priorities. An average person’s goals include their children’s education, marriage, retirement, and so on. However, as lifestyle inflation has increased, there has been a paradigm shift in the behaviour of people. To meet their long-term goals and put a lid on discretionary expenses, Indians have turned towards investment. However, at an initial stage, they do expect higher returns but are unaware of the financial instrument to consider.
There is no one-size-fits-all investment methodology, but to start, they can try equity funds. Equity funds can be segmented based on the investment strategy, market capitalization, investment goal, and risk-taking ability of the investor. Here we shall consider the equity funds based on their capitalization, i.e., and for the person who is just starting his investment journey most ideal of them is large-cap equity funds.
Large-cap equity funds: What are they?
Equity mutual funds are considered a safe bet for new investors as the funds offset market risks and provide fair returns over a long-term horizon. Here, “large cap equity funds” refer to investments in the equity shares of a company that falls under “large market capitalization,” i.e., companies with a market cap of Rs 20,000 crore or more. Indian markets have experienced phenomenal growth in the large-cap segment over the past decade, and hence investors prefer to take an investment decision on these stocks.
These large-cap organisations are well-established players with a history of consistent growth and a good reputation. If an individual invests in large-cap funds, they can expect good returns in the long term. Investments in large-cap stocks are useful for people who are looking to diversify their portfolios and who seek stability in their portfolios. Over a long-term horizon, investors can expect to get a range of 10%–15% of returns if they are prepared to carry on the investment for at least five to seven years to unlock the full potential of the equity funds.
Benefits to reap
Investment in large-cap equity funds can provide several benefits in terms of stability, safety, and wealth creation. Some of them are mentioned below:
It enables diversification: the large-cap funds invest in a diverse portfolio, including blue-chip stocks. These investments are for the long term and are under constant monitoring by the fund managers who analyse the performance.
Liquidity up to the brim: large-cap stocks have a reputation for withstanding changing market conditions while providing the advantage of sufficient liquidity as and when required.
Gradual growth in the capital: As they are directly linked with companies that are known for their outstanding financial performance, these funds gradually perform well in the long term and hence provide a good return on investment over the years.
Before you invest, know these factors.
Financial goals by priority: Large-cap mutual funds deliver consistent returns while carrying a low level of risk. As a result, many investors employ these strategies when planning their investments for retirement or other long-term financial objectives. Therefore, before making any investment, it is advised to know your financial goals.
Assess the appetite for risk: All financial instruments face the impact of market conditions, and the net asset value (NAV), which is the total assets minus the total liabilities of an entity, experiences fluctuations. However, unlike other equity funds, the NAV of large-cap funds is less volatile and yields stable returns while exposing investors to low risk. Therefore, before investing in any instrument, consider your risk appetite.
A look at the expense ratio: The expense ratio is the fee charged by fund companies for managing an investor’s investment. It denotes the portion of the total assets of the fund that is used for administrative and other fund management functions. Consider a lower expense ratio to maximise profits.
Investment period: Investors must refrain from short-term investments as large-cap funds tend to underperform in a smaller time frame. However, the underperformance averages out in the long term.
Taxes to pay: The capital gains acquired by the investment in large-cap equity funds are taxable and depend on the holding period of the investment. Short-term capital gains (STCG) are capital gains earned over a one-year holding period. STCG is taxed at a 15% rate. Long-term capital gains (LTCG) are those made on investments held for more than a year. According to recent budgetary changes, LTCG above Rs 1 lakh will be taxed at 10% without the benefit of indexation.
A better investment choice
Large-cap equity funds tend to diversify their investments across different stocks and sectors, thereby delivering the best potential for return. They can provide the necessary stability, diversification, and potential to earn inflation-beating returns to first-time investors as well as those seeking to build long-term wealth. In a nutshell, large-cap funds are ideal for investors, particularly new investors, seeking long-term capital appreciation in stocks with a higher risk tolerance and the ability to weather volatile market conditions. As a result, if you have a time horizon of five to seven years and are risk-averse, large-cap equity funds are the way to go.
(The author is Founder, Findoc. Views expressed above are personal. Mutual fund investments are subject to market risks. Please consult your financial advisor before investing in mutual funds)