Large cap mutual funds are safe, have predictable returns, easy to understand and less volatile to market swings compared to other diversified equity funds. These funds mirror the performance of the economy and are geared to handle market cycles better. Large-caps mutual funds have the size and scale to weather the bad market phase.
The large cap universe comprises some of the biggest companies, which are well represented in the more frequently tracked indices such as the Sensex and the Nifty.
The flipside of investing in these funds is that they do not deliver exceptional returns in a rising market. The sheer scale and size of stocks in this category means their growth is not as high during a turnaround as it would be for mid- and small-cap stocks, which are nimble. Small and Midcap funds have the potential to give higher returns than large cap funds, the intrinsic risk of small and midcap funds is higher than large cap funds.
Many mutual fund investors prefer large cap funds, because the portfolio mix of such funds limits downside risks in volatile market conditions.
- To be a part of Core Portfolio – You don’t have to worry about frequently changing the fund once you have chosen as per your requirement.
- Provides less volatile returns – Since the Fund portfolio comprises of Well known Blue chip companies, they are fairly stable over a period of time and hence provide more or less predictable returns.
- Provides long term capital appreciation –The Blue chip companies are the ‘Built to Last’ sort of companies because of their Moat / Strengths. Due to this these companies will continue to exist with the test of time, continue to do business, generate profits and provide returns over fairly long period of time.
Approximate Returns Possible:
13% – 25%
Criteria for choosing these funds:
- Fund Returns – Rather than chasing High Peak Returns across the categories, preference was given to consistent High Returns.
- High Alpha – Alpha tells you whether the fund has produced returns justifying the risks it is taking. It does this by comparing its actual return to the one ‘predicted’ by the beta. Say, a fund can be expected to earn a return of 15 per cent in a year (based on its beta). However, it actually fetches you 18 per cent. Then the alpha of the fund is 3 (18 – 15 = 3). In other words, alpha is a measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return.
- Lower Standard Deviation – Standard Deviation (SD) of a fund depicts, that how much the returns of the fund have deviated from the mean level. The higher the value of standard deviation, the greater will be the volatility in the fund’s returns.
- Fund Risk Grade – The risk of investing in a mutual fund not only includes the possibility of losing money, but also the chance of earning less than you would have on a guaranteed investment.
- High Sharpe Ratio – Sharpe ratio represents this trade off between risk and returns. At the same time it also factors in the desire to generate returns, which are higher than those from risk free returns. As standard deviation represents the total risk experienced by a fund, the Sharpe ratio reflects the returns generated by undertaking all possible risks. It is thus one single number, which represents the trade off between risks and returns. A higher Sharpe ratio is therefore better as it represents a higher return generated per unit of risk. The Sharpe ratio is one of the most useful tools for determining a fund’s performance.
- High Sortino Ratio – One refinement of Sharpe is the Sortino Ratio, which uses only downside variance. It is the statistical tool that measures the performance of the investment relative to the downward deviation. The Sortino ratio is similar to the Sharpe ratio, except it uses downside deviation for the denominator instead of Standard Deviation (SD).
- R-Squared – The R-squared value shows how reliable the beta number is. It varies between zero and one. An R-squared value of one indicates perfect correlation with the index. Thus, an index fund investing in the Sensex should have an R-squared value of one when compared to the Sensex. For diversified equity funds, an R-squared value greater than 0.8 is generally accepted to mean that the underlying beta value is reliable and can be used for the fund.
- Beta – Beta is a statistical tool, which gives you an idea of how a fund will move in relation to the market.
- Expense Ratio – Expense ratio is the percentage of total assets that are spent to run a mutual fund. This involves the fund management fee, agent commissions, registrar fees, and selling and promoting expenses. All this falls under a single basket called expense ratio or annual recurring expenses. Expense ratio states how much you pay a fund in percentage term every year to manage your money. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 per cent, then you are paying the fund Rs 150 to manage your money. In other words, if a fund earns 10 per cent and has a 1.5 per cent expense ratio, it would mean an 8.5 per cent return for an investor. Since this is charged regularly (every year), a high expense ratio over the long-term may eat into your returns massively through power of compounding. For example, Rs 1 lakh over 10 years at the rate of 15 per cent will grow to Rs 4.05 lakh. But if we consider an expense ratio of 1.5 per cent, your actual total returns would be Rs 3.55 lakh, nearly 14 per cent less than what would have been achieved without any expense charge. Securities & Exchange Board of India has stipulated a limit that a fund can charge. Equity funds can charge a maximum of 2.5 per cent, whereas a debt fund can charge 2.25 per cent of the average weekly net assets. Lowest Expense Ratio is not considered here because it may mean lower returns also because of low involvement of high quality teams to manage the funds. To keep the expenses low, investment in Direct plans of corresponding Mutual Fund can be chosen.
Taxation / Expenses:
No tax to be paid on redemption if Units held for more than 1 Year. Barring a few funds, many of the funds do not charge any Exit Load if the redeeming after 1 year.
For Many of the funds, once the redemption request is placed the funds will come in bank account within 3-5 working days.
- IF SIP is done, then while withdrawl we need to take care that we can redeem only those number of units which have completed 1 Years of period to avoid Exit Load and Tax.
- It is advisable to invest in Joint Holding.
- Exit load will differ with respect to different funds.
- Please read the Fund Factsheet for more details.
List of Funds:
We have shared the top picks among Large Cap Equity Mutual Funds based on the critera as mentioned in the article. These funds have delivered strong returns across different time cycles, the suitability of each of these funds would depend on risk profile and time horizon. It is advisable to make these mutual funds as a part of your Core Portfolio to give fairly stable returns over a longer period of time.