Equity investment carries certain risk, yet large-cap mutual funds combine stability with constant returns. These funds invest in established firms that dominate their industries.
Their volatility is less compared to mid or small-cap funds. Here, we will cover how large cap funds can offer a balance between risk vs returns for investors.
Understanding Large Cap Mutual Funds
Large cap mutual funds primarily invest in the largest companies by market capitalization, which are considered market leaders. These companies have strong financial performance, quality governance, and resilience through different market scenario swings. They also offer consistent returns and pay regular dividends.
Thus, large-cap funds are more stable and less volatile than mid-cap and small-cap funds. When the economy falters, large-cap funds usually stand their ground, which in turn tends to provide steady returns to the investors.
Large-cap mutual funds provide security for capital, regular dividend income, and sustained growth potential.
One of the most popular sub-categories of large-cap funds is the large cap index fund, which tracks the indexes like NIFTY 50 or Sensex. Investors receive exposure to the broader market and diversification across sectors with low investment costs.
Key Reasons Large Cap Funds Balance Risk and Returns
Here is why large cap funds offer a balance between risk and return.
1. Stability from Market Leaders
Fund managers of large cap funds invest 80% of the capital in large cap companies, which are characterized by good governance, strong business models, and steady cash flow. These companies operate in sectors like banking, IT, FMCG, and pharmaceuticals.
These companies are already established and thus have regular revenues and offer regular dividend payouts. This makes large cap funds popular among investors.
As these companies are well-established, they create a shield from economic downturns and hence help investors lower risk and enjoy sustainable long-term growth.
2. Consistent Long-Term Performance
Among the main advantages of large-cap mutual funds is their ability to deliver returns that are steady for longer investment periods.
Their success is driven by the combination of solid fundamentals and steady growth. For instance, in 2024, out of 30, 14 large cap funds delivered a return of 20%. In the long run, say 10 years, the CAGR return delivered by large cap funds is between 10% to 12%. This offers consistency to investors and helps them with their long-term goals.
Additionally, many of the large cap funds generally provide recurring dividend income, which acts as passive income for investors. This makes large cap funds primarily suitable for investors who are looking to accumulate long-term wealth.
3. Resilience During Market Volatility
Large-cap funds can perform well during sluggish growth periods because they invest in companies that have well-founded businesses with solid fundamentals. Such businesses with extensive experience benefit from diversified revenue streams and can move through different market cycles smoothly.
Also, large caps funds are less affected by short-term volatility than mid- and small-caps funds, making them less risky for investors. However, they still invest in the stock market and thus carry certain risks such as market risk. Investors should consider their risk appetite before making an investment decision.
Conclusion
Large-cap mutual funds provide a balanced investment strategy offering stability, consistent returns, and resistance to volatility. They invest in large companies with consistent growth, efficient financial planning, and a track record of positive returns for investors over the long run.
These funds are suitable for investors who look for long-term wealth creation with lower levels of volatility.
