There are different categorisations in mutual funds, making it easier for investors to choose something that could be the best for them. For instance, there are equity mutual funds and debt mutual funds. Equity mutual funds could work the best for investors who are trying for an aggressive investment option, while debt mutual funds work better for investors who are risk-averse. Similarly, there is a mutual fund categorisation that divides the fund based on the market cap of the companies they invest in. These are large-cap, small-cap, and mid-cap mutual funds. But there is a common notion that large-cap mutual funds are the most beneficial. But is it true? If yes, why? Let us explore the same.
Categorisation companies based on market capitalisation
According to the rules from SEBI, companies are divided into three based on their market capitalisation.
These are companies with the largest market cap in India. Building such a large market cap invariably means that the companies have been in function for a number of years now. Hence, they have a time-tested track record and are very stable. Investing in them means your money could be safe from most of the market vulnerabilities due to the same. But at the same time, they might have reached or might be reaching their growth threshold and hence, you may not be able to get a huge capital appreciation. This factor makes it an apt option for risk-averse investors.
These are companies that are large but not as large as large-cap companies. Hence, investments in them may have lesser stability but greater potential for growth. Mid-cap groups of companies may have vast diversity within themselves compared to the large-cap group.
This is the most extended list of companies based on their market cap because the list of small-cap companies includes all companies that are not included in the large or mid-cap list. Hence, the characteristics of the company may vary as well. Some companies might have great stability but some just mere. Anyway, this group gives you the best chance for capital growth but has a significant risk attached to investing in it.
What are large cap funds?
Large-cap funds are those that invest primarily in stocks of large-cap companies. When a fund invests in a particular kind of stock, it tends to share the characteristics of the stock as well. Hence, investing in large-cap funds is considered a comparatively stable option. Investors choose large-cap funds when they want their investment to gain a steady capital appreciation and, at the same time, have a lower amount of risk.
Is a large-cap fund preferred?
Most investment experts are of the opinion that Indians prefer funds with the lesser risk associated with them. The amount of gold Indian households own and our likability towards fixed deposits are proof of the same. Considering that fact, it could be possible that people in India prefer large-cap companies more as it comes with less risk associated with them.
But are they more beneficial?
How beneficial a large-cap fund is will depend on the kind of investor you are. For instance, if you are looking for aggressive growth, then a large-cap fund might not be your best choice. At the same time, if you are looking for stability and less risk, they could work the best.
But there is no way to say that it is the most beneficial. The same is highly subjective. Hence, the course of action is to talk to an investment expert and find what works for you the best.