How Suitable are Large Cap Funds for First-Time Investors?

Among the various categories of mutual funds, large cap mutual funds are often highlighted as an option that may be suitable for first-time investors. These funds invest in companies with a large market capitalisation the top 100 listed entities in India by market capitalisation as defined by SEBI.

While all mutual funds carry varying levels of market risk, large cap funds are viewed as relatively more stable and less volatile compared to mid cap or small cap funds.

This article explores how and why large cap mutual funds may be a suitable option for new investors, what their limitations are, and how to get started.

• Table of contents

• Large cap mutual funds – Key features
• Reasons first-time investors may opt for large cap mutual funds
• Potential benefits of investing in large cap funds as a first-time investor
• Potential risks and limitations to consider
• How to choose a suitable large cap mutual fund
• Comparing large cap funds with mid and small cap funds
• Strategies for first-time investors in mutual funds
• How to start investing in large cap mutual funds

Large cap mutual funds – Key features

• Investment in blue-chip companies: Large cap funds primarily invest in companies that are considered financially sound and often have a long track record of performance. These are the top 100 listed companies based on full market capitalisation, as classified by SEBI.
• Relatively stable performance: These companies are generally better equipped to weather market downturns, resulting in relatively less volatility and potentially lower fluctuations in NAV.
• Liquidity: The underlying stocks in large cap funds are usually more liquid as they belong to regularly traded companies.
• Transparency: These firms are required to follow strict disclosure norms, enabling better access to information for investors.
• Professional management: Like all actively managed mutual funds, large cap funds are managed by experienced fund managers who analyse markets, companies and potential opportunities on behalf of the investors.

Reasons first-time investors may opt for large cap mutual funds

• Relative stability of capital: These funds prioritise investing in companies that are less likely to experience drastic declines in value.
• Relatively lower volatility: Compared to mid cap and small cap segments, large cap funds usually show relatively lower standard deviations.
• Track record: Most large cap companies are well established and have been through multiple market cycles, offering a history of relatively stable return potential over time.

Read Also: Index Funds vs. Large Cap Mutual Funds: Which one to choose?

Potential benefits of investing in large cap funds as a first-time investor

• Relatively lower risk: Since these funds invest in well-established companies, they are comparatively less affected by economic shocks than other types of equity funds.
• Relatively steady return potential: These companies often offer the potential for relatively steady capital appreciation over the long-term along with potential dividends, which may be passed on to the fund’s investors.
• Diversification: A single large cap mutual fund typically invests in a broad mix of sectors, potentially mitigating concentration risk.
• Suitable for long-term goals: For goals such as buying a home or funding education, large cap funds may help with potential long-term wealth creation.

Potential risks and limitations to consider

• Limited growth potential: Large companies may not grow at the same pace as mid cap or small cap firms, which could mean relatively modest capital appreciation potential.
• Market dependency: Even large companies can be impacted during an economic downturn, affecting fund valuation.
• Lower flexibility: SEBI mandates 80% allocation to large cap stocks, leaving less flexibility for fund managers to explore other market capitalisations.
• Expense ratio and exit load: It’s important to check the fund’s expense ratio and whether there is an exit load before investing as it can impact the potential benefit.

How to choose a suitable large cap mutual fund

• It’s recommended to not rely solely on the recent performance of the fund; instead, consider long-term consistency over 5-10 years.
• Check the expense ratio before investing. A lower expense ratio means more of your potential returns are retained.
• Check the credentials of the fund manager and choose funds run by managers with proven track records.
• It is advisable to check the exit load and minimum investment required before investing to avoid surprises later.

Comparing large cap funds with mid and small cap funds

• Volatility: Large cap funds are relatively less volatile than mid or small cap funds.
• Return potential: Mid and small cap funds may offer higher potential returns but come with higher risks.
• Liquidity: Stocks in large cap funds are have comparatively higher trading volumes, potentially making the units easier to buy or sell.
• Suitability: Large cap funds may be more favourable for new or conservative investors, whereas mid and small cap funds may suit experienced or aggressive investors.

Read Also: How Large-Cap Funds Help to Achieve Financial Goals

Strategies for first-time investors in mutual funds

• Systematic investment plan: Start with an SIP as it allows you to invest smaller amounts regularly and averages out the cost of investment, thus smoothing out short to mid-term market volatility.
• Set clear goals: Knowing why you want to invest is very important. You should know if the investment is for a short-term goal or long-term purpose.
• Review periodically: Investing once and relaxing after that is not an appropriate strategy. Check the performance once or twice a year. Avoid reacting to short-term market movements.
• Stay invested: Having patience is an important trait to reap the potential benefits of equity oriented mutual funds. They may deliver a reasonable return potential over longer durations.

How to start investing in large cap mutual funds

• Complete KYC formalities: Provide PAN, Aadhaar and other required documents to a registered intermediary.
• Choose a platform: You can invest directly through an AMC website or through a third-party app.
• Select the fund: Use filters like historical performance, expense ratio and fund manager details.
• Start an SIP or lumpsum: SIPs offer convenience, automation and affordability. Lumpsum may be used if you have a large amount ready, although timing the market is never easy.
• Track and review: Stay updated with quarterly fund reports.

Conclusion

Large cap mutual funds may be a relatively stable and easy-to-understand investment avenue for those starting their mutual fund journey. They prioritise investing in well-established companies that may be relatively resilient to market cycles. As always, it's important to consult with a SEBI-registered investment advisor before making any financial decisions.

FAQs:

What makes large cap mutual funds suitable for first-time investors?

Large cap funds invest in companies that have a strong market presence and relatively consistent earnings. The relatively lower associated risk might make them more appealing for first-time investors.

Are large cap funds better than small cap funds for beginners?

They may be more favourable for beginners due to their relatively lower volatility and more predictable performance compared to small cap funds.

How much should a first-time investor invest in large cap funds?

There is no fixed amount. You may start with an SIP as low as Rs. 500 per month, depending on your financial goals and risk appetite. The minimum investment amount also differs from scheme to scheme.

What are the returns expectations from large cap mutual funds?

Potential returns may vary by market conditions. Historically, large cap funds have delivered around 10–12% annualised returns over the long-term, though this is not guaranteed.

Do large cap funds have lower risk compared to other mutual funds?

They are generally considered relatively less volatile than mid cap and small cap funds due to the well-established companies they invest in.