Why should you invest in a large-cap equity fund
Why should you invest in a large-cap equity fund
Investing in mutual funds appears to be the easiest thing at least as of now. Many websites and mobile applications give out all numbers and the facilities to sort them based on historical returns. Investors are quick to sort mutual fund schemes in descending order of one-year returns. Obviously, the schemes which are top performers are selected for investments promptly. No wonder, money is flowing into small-cap equity schemes and mid-cap equity schemes. However, it is not the right criterion to invest in an equity scheme. Never select a scheme looking at the recent performance. Many times, it may not be the best thing to do.
This holds even greater significance today as a large number of investors have been focusing their attention more on mid-cap and small-cap equity schemes rather than large-cap schemes. Mid-cap and small-cap schemes on an average have given 56.25% and 56.07% returns respectively, in one year ended April 2, 2024, as per Value Research. Compared to this large cap equity funds have given 42.34% returns. No wonder, many investors would like to skip the large cap equity funds. However, this may be a good time to allocate money to large-cap if they are missing in an equity portfolio. Let us understand this in more detail:
To begin with large cap equity schemes, invest minimum 80% of the scheme's money in the shares of top 100 companies by market capitalisation. Many of these companies are well-established businesses with strong balance sheets that can weather turbulent times. The new financial year begins on a positive note with stocks and gold hitting all time high in the US. However, volatility cannot be ignored and investors need to take into account the risks round the corner.
There are fifty countries in the world including India which are expected to conduct elections and outcomes of these elections can influence policy framework and in turn create a new economic sentiment. To add to the complexity the geo-political situation is far from stable. Russia-Ukraine, Israel-Mossad conflicts are going on and escalations in these or fresh aggression in other parts of the world can strain supply chain efficiencies. Interest rates are expected to go down soon in the US. And the Reserve Bank of India too is expected to follow its American counterpart in the second half of the CY2024. Three cuts in interest rates in the US are already priced in. Though lower interest rates are conducive for the equity markets, any delay in reduction in interest rates can be a sentiment spoiler. After the last year’s rally, valuation premium enjoyed by mid-and-small-cap stocks over large-cap equities have gone up.
In context of this, large cap equities appear better placed. Ahead of elections, many institutional investors are expected to stick to large-cap stocks. Large-cap equities can withstand volatile phases in equity markets. Well-capitalised balance sheets of many large-cap stocks can help fund the next leg of growth, which may not be the case with many small-and mid-cap stocks especially if interest rates do not go down and stock markets turn volatile. High interest rates tend to make borrowings costly for businesses and volatile stock markets make it difficult to raise capital by issuing additional stock.
Large-cap stocks can also be big beneficiaries of the expected influx of money from foreign portfolio investors. In March 2024, FPIs made net purchases worth Rs 35,098 crore. If the dollar index goes down after a cut in interest rates, more money may enter Indian stocks from overseas. In many cases, this money is expected to buy large-cap Indian equities or large-cap focused equity indices such as the Nifty 50.
Reasonable valuations and relatively better revenue visibility make large-cap stocks a must have in a core portfolio. Savvy investors should never ignore large-cap equities. Many times, to save on costs investors, opt to include large-cap equities by selecting an Exchange Traded Fund or index fund tracking the Nifty 50 and the Nifty Next 50 index. Among actively-managed large-cap equity schemes, investors can consider schemes offered by Nippon, HDFC and ICICI Prudential AMCs.
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Aggressive investors may want to look at flexi-cap funds with high allocation to large-cap equities and an ability to go for mid-small cap stocks in fair weather. Such schemes can effectively offer better risk-reward compared to a large-cap index fund. We like Flexi-cap schemes like BoI, Invesco, Helios, Mirae, Franklin, JM and WhiteOak can be considered for investments. For investors with very low or no allocation to large-cap equity funds, gradual investments through systematic investment plans (SIP) or systematic transfer plan (STP) make more sense. This helps to reduce timing risk. Investments in large-cap and flexi-cap schemes should be done with a minimum five years tenure.
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Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.
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