The Securities Exchange Board of India (SEBI) which regulates the financial markets in India, classifies Large Cap Mutual Funds as those funds that invest primarily in the top 100 companies by market capitalization. These funds invest in the largest companies in India; those companies that are leader in their respective sectors. Some of the biggest brands in our country are included in the best large cap mutual funds.
Attributes of Large Cap Mutual Funds
SEBI mandates that at least 80% of the corpus in large cap mutual funds are invested in the top 100 companies in India. The fund manager is free to invest the remaining 20% in mid and small cap companies or hold some cash portion. The best Large cap mutual funds are the least volatile among other equity funds. They offer stable returns over long periods of time. Since the monies are invested in the top companies, these funds can withstand market downturns. These funds are suitable for conservative investors who are looking for modest growth in their investments.
Advantages of Large Cap Mutual Funds
Stability to your portfolio
During times of uncertainties and economic downturns, large cap mutual funds tend to perform better than other equity mutual funds. They protect your downside risk and give better returns when compared to mid and small cap funds. They are relatively less volatile and deliver better risk adjusted returns.
Long-term wealth creation
Conservative investors find these funds attractive and include them towards their long term goals. Large cap funds in the form of Index Funds are gaining popularity for their simple and cost effective means of generating returns. By choosing to invest in Index Funds, investors want to get rid of the cumbersome exercise of trying to predict which active fund will beat the benchmark.
How are Large Cap Mutual Funds Taxed
Gains arising out of investments in large cap mutual funds are taxed as per other equity instruments where short term gains for investments held less than one year are taxed at 15% and long term gains for investments held above one year are taxed at 10%. The income tax department provides an exemption of ₹1,00,000 every financial year on long term capital gains. Refer to our ultimate mutual fund taxation guide for FY 2020-21, for more details on how gains from different types of mutual funds get taxed.
Best Large Cap Mutual Funds
The above table illustrates heat map of the yearly returns for the most popular large cap mutual funds in India. It is evident that no single mutual fund stays in the top year after year and chasing the best large cap mutual funds or jumping from one best fund to the other could cause you more harm. Let take an example, let’s say you wanted to invest ₹ 1,00,000/- in 2013, you look at the previous year’s returns and select the fund with the best performance, and you would end up investing in Nippon Large Cap Fund.
But by the end of the year you end up being disappointed, your dream fund which gave the best returns was among the bottom performers. So you jump to the best large cap mutual funds of 2013; which was Axis Blue Chip Fund, in early 2014 and stay invested. If you did that, your returns would have been lower as of end 2019 by ₹ 23,000/- even after out performance for two consecutive years from Axis in 2018 and 2019. Not to mention about the costs incurred in the form of taxes or exit loads. And this happens across different time horizons across different fund types.
It is important to realize that predicting the best large cap mutual funds is very difficult and one approach to address this has been to acknowledge the increasing preference for Index Mutual Funds and allocate monies in them. Index funds invest in the popular benchmarks like Sensex and Nifty and distribute your investments among different companies in the same proportion as in the benchmark.
Index funds eliminate the need to predict the best large cap mutual funds and saves you from incurring transaction costs such as exit loads and taxes when you jump from one fund to the other. Before you get started with investments in these funds, it is necessary to know if equity funds suit your risk appetite. Get in touch with your fee only financial planner and undertake a risk profiler exercise today to know your ideal asset allocation.
What is more important than choosing best large cap mutual funds?
While most people are running after the best performing fund, they fail to do proper due diligence of their personal circumstances. One needs to ask the below questions first;
What is my financial goal?
It is important to know why you are investing. Most people invest just because some fund is giving the best returns. One needs to identify their goal; what is the time horizon they have? What it the present cost of the goal? How will inflation impact their goals? What is the likely future cost of the goal?
What is the ideal asset allocation?
The ideal asset allocation for an individual depends on factors like the risk profile, investment time horizon and investment preferences. If you goals are within 5 years; equities and equity mutual funds should be avoided as they are very volatile for short term periods. If you have longer periods to stay invested equities may be preferable, but the extent of equity allocation is dependent on your risk profile. Aggressive investors can allocate 80% – 90% of their investments in equity, but for most investors, investing 60% – 70% in equity even for longer periods would be most preferable.
What are the Expected Returns?
People chasing the best returns are fooled by marketing tactics which pick random data points showing phenomenal returns. They fail to understand that the long term performance records of mutual funds show an achievable return of 10% – 12%. For debt instruments it would safe to invest in instruments that deliver returns between 6% – 7%. People chasing superior returns in debt instruments have been punished by the poor quality papers leading to defaults and downgrades.
Choosing the right financial planner will help you find answers to the above questions and arrive the right asset allocation for your goals.