Understanding the risks involved before investing, and how to mitigate losses could fast-track the process to achieving your investment goals. This is only possible through a proper investment strategy which guides you through the investment journey. An investment strategy acts as a manual, enabling you to choose and opt for the best investment plan depending on your profit objectives and timeframes, and provides you with the risk-reward potential of your investments.
For those with a low-risk investment profile who plan to get their feet wet in equity investments, investing in a large-cap fund, even amidst the fluctuating markets would be the ideal entry point. Large-cap funds, in comparison to small-cap and medium-cap funds are less prone to market movements, and are attractive to investors who are risk-averse, or are first-time investors in the equity market.
Investing in large-cap funds over a long term provides better capital appreciation while regularly distributing the dividends. Large-cap funds are financially strong, and aren’t as affected by market movements, and are ideal for those with a long-term approach. While the large-cap funds are not immune to market fluctuations, they offer stability and sustainable growth, as they can withstand the market slowdown. Furthermore, for a major part of the last decade, large-cap funds have been able to outperform Sensex, with 80% of the funds beating Sensex in 2017.
Benefits of Large-Cap Funds
Even during the bear market, large-cap funds have traditionally managed to provide average returns, while the small-cap and medium-cap funds have taken the biggest hits. The three-year returns of large-cap funds have generally been 8-12%, providing better returns to the investors.
Large-cap funds show greater potential for capital appreciation, and are far more resilient than small-cap and medium-cap funds, while their short-term prospects are predictable. Furthermore, considering the investments made are for longer durations, large-cap funds are more stable, and taking market volatility into consideration, you will lose less money as compared to investing in small-cap or medium-cap funds.
Risk Assessment
While large-cap funds are subject to market risk, the Net Asset Value (NAV) does not change aggressively, providing better stability to your investment portfolio. Large-cap funds provide equity exposure to high quality stocks, and do not perform irregularly, making them the safest choice for first-time investors. While large-cap equity funds tend to underperform during market slump, they average out in the long run, providing three-year returns of 8-12% on average.
Investment Cost
Expense ratio, a fee to manage your investment, is charged by the large-cap equity funds which appears as a percentage of average asset under management (AUM). Expense ratio reveals the operating efficiency of the fund, and as per the directives of Securities and Exchange Board of India (SEBI), the upper limit of the expense ratio cannot exceed 2.50%. A large-cap fund with a lower expense ratio and a longer holding period would ensure better returns.
Tax on Gains
The gains you earn by redeeming the large-cap funds units are taxable, and the rate of taxation depends on the holding period. For short-term capital gains (STCG), where the holding period is up to one year, the rate of taxation is 15%. As per the recent changes in the 2018 budget, for long-term capital gains (LTCG) in excess of Rs. 1 lakh, where the holding period is more than one year, the rate of taxation is 10% without the benefit of indexation.
According to the numbers released by the Association of Mutual Funds in India (AMFI), there were around 2.57 crore mutual fund SIPs in January 2019. Large-cap funds provide an attractive, low-risk opportunity for first time investors entering the equity market, as it involves companies with large market capitalization, with a track record of stable performance during times of market fluctuations.
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