Why You Should Invest in a Large Cap Fund?

If you want to secure your future financially, you may have to get a hold of financial planning. Financial planning is necessary because it may teach you how to manage your money. Money management and financial planning are supposed to go hand in hand. A lot of young are unable to control their expenses and find themselves depending on others by the end of the month. People need to understand that they are going to need more money to survive in future than they need now, hence they need to start saving a little portion from their monthly income so that they can start investing. A lot of people feel that saving alone is enough but in reality, if you want to overcome inflation you may have to start investing soon.

Before investing, make sure that you list out your short term and long term goals so that you can prioritize your investments accordingly. Having a realistic set of goals may help you make the right investment decision. Once you know your goals, the next thing to do is understand your risk appetite. Remember that every investment scheme carries a different risk profile and hence it is better to know your risk appetite before investing in any scheme. There are some investors you have zero risk tolerance and do not mind investing in schemes that offer low fixed interest rates.

However, if you want to give your investment portfolio a slightly aggressive touch, you may consider investing in mutual funds.

What is a mutual fund?

A mutual fund is a pool of professionally managed funds, where the fund manager buys and sells securities in accordance with the scheme’s investment objective.

SEBI, the regulatory body of mutual funds in India, describe them as, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.”

Fund houses collect money from investors sharing a unique investment objective and invest this pool of funds across multiple assets including equity, debt, government securities, corporate bonds, etc. Mutual fund holders receive shares in the form of units in quantum with the money invested and depending on the fund’s existing NAV.

Large cap funds are those equity funds that invest in stocks of companies having large market capitalization. The rest of the article focuses on large funds and why one might consider investing in large cap funds.

What are large cap funds?

Market caps are defined as per SEBI regulations as below*: a. Large Cap: 1st -100th company in terms of full market capitalization. b. Mid Cap: 101st -250th company in terms of full market capitalization. c. Small Cap: 251st company onwards in terms of full market capitalization

As stated earlier, these funds invest in financially established companies. Over a period of time, certain companies have earned a reputation for being financially stable and large cap funds invest in such companies. Being equity oriented funds, large cap funds invest in equity and equity related instruments of companies having a large market capitalization.

Why should you invest in large cap funds?

Here are some of the reasons why you may consider investing in large cap funds:

Professionally managed funds: Large cap funds are usually managed by experienced fund managers. It is the duty of the fund manager to club his expertise and years of experience into buying and selling securities so that the fund is able to meet its investment objective. Large cap funds owned by reputable AMCs usually host a professional management staff and hence even those with minimal knowledge about mutual funds may invest in large cap funds.

Large cap funds are available in growth and IDCW option: If you are investing large cap funds for regular income, you may opt for the IDCW option. But if you are investing in large cap funds for long term investment then you may go with the growth option.

You can invest in large cap funds via lumpsum or SIP: Investors having surplus cash parked with them may opt for the lumpsum investment. However, if you want to give your investments a systematic approach, you may invest in large cap funds via SIP. Systematic Investment Plan is an easy and hassle free way for one to continue investing at regular intervals. With SIP, all one needs to do is inform their bank and every month on a fixed date, a predetermined amount is debited from their account and electronically transferred to the large cap fund.

These are some of the reasons why you may consider investing in large cap funds. However, if you are completely new to investing or mutual funds in general it is better to seek the help of a financial advisor before investing.

*Source -https://www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.