A scheme which is consistently beating the benchmark and its category peers over a long term may become a part of one's portfolio.
Companies with high market capitalization form the core of a large-cap mutual fund scheme. Hence, most financial planners suggest investing in large-cap funds to form the base of one’s portfolio. After all, banking upon the top companies with high market-cap is a relatively safer bet against the volatility which is inherent to the stock markets.
According to SEBI, a large-cap mutual fund will represent 1st to 100th company in terms of full market capitalization. A large-cap fund launched by any fund house will have to maintain a minimum of 80% of total assets in equity & equity-related instruments of large cap companies. Therefore, a large-cap fund is defined as an open ended equity scheme predominantly investing in large cap stocks. With at least 80 per cent of money invested in the top 100 companies makes it a popular category among investors.
Large-cap stocks, the predominant holding of a large-cap MF scheme, are considered to be highly liquid and well-research firms with high level of interest among big investors, including institutions, HNIs and hedge funds. The volatility in them, therefore, is considered to be less compared to mid- or small-cap stocks.
Choosing the right large-cap scheme is equally important. Not all will show similar performance even though the gamut of stocks are the same. Over the last 1 and 5 years, the large-cap fund category has generated nearly 11 per cent annualised growth respectively. However, some of the funds at the bottom are sitting on negative returns while the toppers have generated 15 per cent or even higher.
With every fund house having a large-cap fund to offer, how should an investor decide? “This is a difficult question as most of the portfolio composition would look the same. I suggest distributing the exposure among the recently good performing fund and a fund performing well over a longer time frame,” says Vivek Bajaj, co-founder, StockEdge. A scheme which is consistently beating the benchmark and its category peers over a long term may become a part of one’s portfolio.
As an alternative to large-cap funds, one may consider investing in an index fund. Being an index fund, it will track the index to which the fund is benchmarked to and invest a minimum of 95 per cent in the index constituents. In a large-cap fund, the fund manager has an active role in the stock selection and allocation among the index stocks, while the index fund will have to purely replicate the index.
For your long term goals, choosing the right scheme and then sticking with it for a long period is important. The short-to-medium volatility and performance may be overlooked as equities have the potential to generate a high inflation-adjusted return over the long term.