Monday, 18 July 2016

Large Cap Funds are Safer and Stable : A Must for Wealth Creation

Large Cap Funds are safer and provide stability and must, therefore be considered for wealth creations by you.

It is a known phenomenon that large-cap funds provide stability and weather hostile economic conditions.
You too recognize that large caps are safer and provide stability to their portfolios for wealth creation.
Even financial planners ask investors to make large-cap funds an integral part of their portfolios - ahead of mid-cap and small-cap funds.

Typically, during volatile times when growth is subdued, large-cap funds or even stocks provide cushion as they constitute companies with established businesses, strong revenues and hike in market share. If we dig data, we will find that several large-cap funds have delivered returns in the range of 5% to 10%, whereas equity markets have given returns of hardly 1.5%. This shows that many large-cap funds have withstood unstable times.

However, it must be noted that large-cap funds have always remained competitive against midcap and small-cap funds along with multi-cap funds over the last few years. In the last 10 years, on an average large-cap funds have delivered returns of 11.5% while small-cap and mid-cap funds have given returns of 15.7% and 16.4%, respectively in the same time frame.

The important factor for you to consider is that you should not fall for returns of mid cap and small-cap funds as they tend to fall more than large-cap funds in bear markets.

This article explains you important aspects of investing in large-cap funds and staying invested in them during volatile market conditions to emerge victorious.


WHY INVEST IN LARGE-CAP FUNDS ?

The current rise in the market, which began towards the end of 2013, has finally faded due to a host of international as well as domestic factors. Globally, factors like Fed policy, economic slowdown in China and surging oil prices have kept the Indian markets on a tight rope.
On the Indian front, stable inflation - although it has started surging ahead - and high interest rates have kept the equity markets positive.

The Banking sector is not only the backbone of the Indian economy but also forms an important part of the large-cap index and BSE 100 index. In the past few months, efforts were made to clean up the banking system, initiate rate cuts and transmit them to lower rates. Government measures in manufacturing and railways sectors
are likely to bring India out of the economic slump and help a number of large-cap stocks.

Investors who believe in the long-term growth story of India and want less volatility in their portfolios can certainly look at investing in large-cap funds that have the ability to give positive returns in the next five to ten years.

BALANCE INVESTMENTS BETWEEN LARGE- AND MIDCAP FUNDS

The advantage and disadvantage of having large-cap funds in one’s portfolio is that they mirror the performance of the equity markets as fund managers have lesser scope of deviation from index weights.
 

However, as explained herein, there are many funds like SBI Bluechip Fund, Birla Sun Life Frontline Equity and ICICI Prudential Top 100, among others that have their own investment strategies and a history of outperformance across market cycles.
 

In the past few months, many funds have seen little underperformance in large-cap funds largely due to investments in sectors like software and pharmaceuticals, which have been a little stressed. Again, investments in banking and financial services have witnessed tough times over the past two years, affecting the entire large-cap fund basket.

For diversification, you need to understand that the level of
diversification differs for large-cap funds as compared to mid-cap or small-cap funds. It is a known fact that large-cap stocks are more liquid, which means that it is easier to enter and exit these stocks without impacting the price of the stock on any given day.



Must Read : Best 3 Midcap Churning Money For Investors

The functioning issue in mid-caps is the lack of liquidity which can become crucial during bear markets or volatile times when fund managers do not get the desired price to sell their holding in the mid-cap or the small-cap segment.


As far as large-cap funds are concerned it helps that the overall market capitalization of large-cap stocks is high (in the context of domestic equity market capitalization) and it is easier to buy just one or two stocks within a sector or a theme. 
For example, if a fund manager is bullish on India’s growth, he will invest in State Bank of India (SBI), Larsen & Toubro (L&T) owing to long-term faith in these companies despite some short-term reservations. In a large-cap fund, given that the stocks are liquid and well-established, you can get reasonable sector exposure with fewer companies. 

On the other hand, in mid- and small-cap funds, the number of stocks can be higher as sometimes you cannot buy just one stock for the total value of exposure the fund managers want and they might buy four or five stocks with similar characteristics.

Overall this kind of tricky situation arises when there is a bull market. But it is always advisable for you to have diversification and a larger share  of portfolio in large-cap funds rather than mid-cap and small-cap funds.

Must Read : Best ELSS Tax Savings Funds to Invest in India in 2016 for Long Term

IN A NUTSHELL

Given the returns of Indian equity markets, many times mid- and small-cap funds have been able to deliver better returns than large-cap funds. However, that does not mean your should stay away from large caps and invest only in mid-cap
funds. Though many times, large cap funds have underperformed the broader equity markets, it cannot be
the only criteria in determining where you must invest your hard-earned money.


You should understand that performance of various schemes varies significantly from each other even within the same category. It is important that you consider the long-term track record and analyze the potential of funds to generate  higher risk-adjusted returns before investing in any mutual fund.

After thinking of proper funds to invest, your should look at their risk appetite and risk tolerance level as they also play an important part in your decision making. The best thing
for your is to adopt proper asset allocation strategy.


If you have 65%-70% equity in your portfolio and the remaining in  debt funds, you should invest at least 50%-60% of its equity exposure in large-cap funds and the remaining in mid- and small-cap funds.
However, you should continue to review your portfolios and adjust or change asset allocation according to gains or losses made in the period 


Must Read : Why Liquid Funds are better alternative to Savings Bank A/C


It’s a thumb rule in equity markets globally that the longer the investors stay in the market, the lesser is the risk of losing money, and market volatility affecting their portfolio.
You must look at the history of any mutual fund before investing in it. In the Indian markets there are several funds such as HDFC Top 200, Franklin India Bluechip Fund and Reliance Growth Fund, which are two-decade- old funds and have given annualized returns in the range of 21% to 14%, respectively.


For you it is always better to expect your funds to do well under all market conditions. But under difficult circumstances, one must learn to ignore short-term underperformance of your funds. You should invest in a fund that has a proven long-term record and comes from a fund house that follows prudent investment processes and systems. 


The selection of the right mutual fund also plays a crucial role in investment and long term wealth creation for you.
A large-cap fund should remain the core portion of an equity investor's portfolio. These funds have lower risk as compared to a small- or mid-cap fund and a sector fund. So, any investor who needs to invest in the equity space should allocate a large portion of his/her portfolio in large-cap funds.
If you are a First-time investor you should not just look at returns of mid- and small-cap funds and invest there but should first invest in large-cap funds, and eventually shift your money to thematic or mid-cap funds.


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Who doesn't like a financial healthy life,In case if you want one contact me for Financial Planning, please do drop an email to me at vipuls1979@gmail.com. I would be happy to assist you

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