We all have dreams that we aspire to achieve in our lives. Rano’s story is similar to many of us. She wanted to pursue higher studies in management, but her family couldn’t afford the hefty fees. This is a common challenge; like Rano, many children are unable to continue their education due to financial constraints.
However, Rano’s story takes a different turn. One day, during her first year of college, she came across a newspaper advertisement that said, “Equity Funds are subject to market risk.” Curious, she began searching for more information about this phrase. While browsing the internet, she eventually found a comprehensive article on Equity Mutual Funds, specifically focusing on large-cap equity funds.
The article explained: Large-cap Equity Mutual Funds invest the pooled corpus of money into shares of well-established, financially stable companies with a large market capitalization. These funds are known for their relative stability and are considered less risky compared to mid-cap and small-cap funds. In simple terms, large-cap equity funds invest in shares of large companies on your behalf. Although she found it difficult to understand at first, she continued reading.
The article further explained that at least 65% of the portfolio must comprise investments in equity and equity-related instruments, with a significant portion typically allocated to large-cap stocks. The remainder can be invested in money market instruments or debt securities, depending on the investment objective of the scheme. Compared to other types of mutual funds, equity fund investments, especially large-cap funds, are associated with a moderate level of risk but are also expected to generate stable returns over the long term.
The mention of stable returns caught her attention, and she eagerly read the next line, which stated, “Furthermore, there is no such thing as a ‘one-size-fits-all’ equity fund. There are many different types of equity funds based on investment strategy, market capitalization, and taxation benefits, each with its own investment objective that must be matched to your risk profile. However, large-cap equity funds are often recommended for investors seeking steady growth with lower risk.”
After giving some thought to what she had read, Rano began to wonder if she could ask her father to invest in a large-cap equity mutual fund.
She approached her dad and explained everything. She also mentioned that a key advantage of investing in large-cap equity mutual funds is their ability to provide inflation-beating returns while offering relative stability. This means that, despite rising inflation and market fluctuations, the returns should be sufficient to offset these effects. Investing in large-cap equity mutual funds also enables the investor to have a diversified portfolio, as the money is spread across several large, established companies.
Moreover, losses in one large-cap stock can be offset by gains in others, minimizing overall risk. Additionally, these mutual funds are managed by professionals, making it easier to invest. Rano suggested, “Dad, why don’t we start investing in large-cap mutual funds together? My internship earnings and your savings could help cover the fees for my MBA program. Maybe we could also consult with professional analysts to understand large-cap equity mutual funds in-depth?”
Her dad agreed to consult a professional, and they dialed a number with the tagline, “We can help you invest with ease.” The analyst answered the call, and Rano’s dad began by saying, “My daughter wants to study for an MBA, but we might not be able to save enough for her education. Can you help us understand how mutual funds, particularly large-cap funds, could help us save this amount over the next 3-4 years?” The analyst listened to their concerns and began explaining the different types of investment caps.
He explained, “There are three types of caps: Large, Mid, and Small. However, it’s important to consider the factors that affect equity mutual funds before investing. When it comes to risk, large-cap equity mutual funds are comparatively less risky than mid-cap and small-cap funds because large companies tend to be more stable and less affected by market fluctuations. Small-cap and Mid-cap funds have a higher risk profile but also offer significantly higher growth potential.
“On the other hand, large-cap funds, which I think would be perfect for your daughter’s education fund, provide good returns while significantly reducing investment risks. This will help you save enough money for her education. Therefore, depending on your risk appetite, you can choose the type of equity fund that suits you best.
Frequently Asked Questions
1. What are Large Cap funds?
Large-cap funds are those funds that invest a big or larger proportion of their corpus in the top 100 companies by market capitalization, as defined by SEBI.
2. Are they risky?
Market risk exists but is comparatively lower from small cap and mid cap funds due to the financial health of the companies. Investors should be prepared for possible moderate losses.
3. What are the usual returns?
Usually provide stable and more predictable returns, but lesser growth potential due to the size of the companies.
4. What about the time horizon?
Generally, have a time horizon of 3-5 years because the companies are mature and can provide capital appreciation over this period.
5. Are they safe investments?
The funds are known as safer form. They can easily withstand the bear market. Also, they can deliver stable returns when compared to the middle and the small cap funds.
6. Why should I invest in large cap funds?
Well, those companies which have a market capitalization of more than Rs. 20,000 crore come under large cap funds. These companies have a good track record which is also backed by good governance practices. So, you can develop your trust since they abide by the healthy corporate ethics.
7. Who should invest in large cap funds?
Since these funds are less volatile in nature relative to other funds and their performance is generally stable, it makes investors less vulnerable to the equity market. If someone is looking to diversify their portfolio, large cap funds are more suitable. If you don’t want to take high risks and want to stick with pretty returns, then you must think of investing in it.
8. Are there any factors that an investor should consider here?
Yes, you can look for: What is investment purpose or objective?, What has been the past performance of large cap funds, How much experience does the fund manager have?, What is the expense or cost ratio and how will it impact? This will help you understand if large-caps funds are your preference? I believe, if you have 3-4 years and you want to get a stable yet good return that is not volatile as well, then large-cap funds are the most suitable ones for your daughter’s education. The analyst said. He also added that the fundamental goal of investing in equities mutual funds is to increase your wealth at a faster rate than inflation. Equity fund returns are significantly higher than those of other mutual fund types. Also, for people searching for a short-term investment, equities investments are not the best option, so at least 3-4 years investment is the best. After listening to the analysts, Rano and her dad agreed to invest in Equity Mutual Funds with a large-cap.
They couldn’t believe that the analyst was right. They had a genuine amount of deposit in their bank account after 4 years of investment with a large cap. And they now had enough money to pay for Rano’s MBA program fee. Now, this was an emotional moment for both Rano and her dad. Afterall why not? All thanks to Rano’s curiosity to know and courage to take the risk.
One more important lesson to learn here. Most of us give up on our dreams due to lack of money, but money is not an intrinsic value; it can be generated through timely investment. And Rano proved it through Equity Mutual Funds.
Leave a Reply