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Why should large caps be part of your investment portfolio? Experts answer
The decision to invest in large-cap funds hinges on your circumstances and investment objectives. Although large-cap funds may present lower potential returns compared to smaller companies, they have the potential to deliver consistent and stable growth over the long term.
The Indian markets responded favourably to the decision of central banks to maintain unchanged interest rates, particularly as it coincided with investors’ anticipated outcomes. However, seasoned experts suggest that the market may have already factored in the status quo, and the absence of any alteration affirmed expectations, mitigating the possibility of volatility.
The surge in valuations during a market rally can present a dual challenge for investors. This underscores the importance of exercising a prudent strategy when it comes to market investments. Numerous investors prefer large-cap stocks due to their stability, in contrast to the volatility associated with mid-cap and small-cap stocks.
Moreover, large-cap stocks frequently draw substantial investments from both foreign institutional investors (FIIs) and domestic institutional investors (DIIs). These institutions possess extensive research capabilities and engage in investments only following meticulous analysis, thereby enhancing the well-researched nature of large-cap stocks.
Engaging in individual stock investments demands thorough research and analysis, a process that can prove time-consuming and daunting for many investors. The challenge lies in identifying the appropriate stocks to include in their investment portfolios. This is one reason why opting for large-cap mutual funds may be a preferable choice compared to directly purchasing stocks in this sector.
Also Read: Top performing mutual funds of 2024 based on past returns. Should you invest too?
Why invest in the large-cap funds?
Large-cap companies, owing to their size, brand recognition, and diversified revenue streams, frequently exhibit more resilience in the face of economic downturns when compared to smaller counterparts. This results in reduced volatility within large-cap funds, although it’s important to note that they are not entirely impervious to market fluctuations.
The majority of large-cap funds focus on investing in companies boasting significant market capitalization, often recognized as “household names”. These companies typically stand as well-established leaders in their respective industries, demonstrating a proven track record of stability and profitability.
Suresh Sadagopan, Founder, Ladder7 Wealth Planners shared, “A large-cap fund comes with a lower risk among equity investments. The underlying investments of equities are some of the biggest category leaders among the industry segments they represent. Large-cap funds are an excellent way to participate in Equity funds while building a portfolio.”
The amalgamation of stability, diversification, and reduced volatility typically results in a lower risk profile for large-cap funds when contrasted with their mid-cap and small-cap counterparts. This renders them well-suited for investors aiming for capital preservation and consistent growth over the long term, especially those with a lower risk tolerance.
Certainly, liquidity stands out as a notable benefit of large-cap funds for various reasons, one of which is handling redemption pressures. Typically, large-cap stocks exhibit high liquidity, implying that they can be readily bought and sold in substantial quantities without causing a substantial impact on the price. This capability enables fund managers to fulfill redemption requests efficiently and with minimal costs.
Viral Bhatt, Founder, Money Mantra said, “Large-cap funds can be a valuable addition to your investment portfolio for several reasons, depending on your specific goals and risk tolerance. Here are some key benefits to consider
Lower risk: Compared to mid-cap and small-cap funds, large-cap funds invest in well-established companies with larger market capitalizations. These companies tend to be more financially stable and resilient to market fluctuations, offering a lower overall risk profile. This can be appealing to investors seeking capital preservation and steady returns.
Diversification: While large-cap funds focus on established companies, they still provide diversification across different industries and sectors. This helps to spread your risk and reduce the impact of any single company's performance on your portfolio.
Dividend income: Many large-cap companies pay regular dividends, which can provide reliable income for investors. This income can be reinvested for further growth or used to supplement your regular income.
Liquidity: Large-cap stocks are generally more liquid than smaller companies' stocks, making them easier to buy and sell when needed. This can be important for investors who may need to access their funds quickly.
Long-term growth: While offering lower potential returns than mid-cap and small-cap funds, large-cap funds can still provide consistent long-term growth over time. This is due to the established track record and stability of the companies they invest in.”
While less probable, large-cap stocks and funds may still undergo price corrections stemming from broader market events, industry-specific shifts, or company-specific issues. Nevertheless, such occurrences are infrequent, emphasizing the inherent stability that stock market investors seek.
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First Published:21 Feb 2024, 11:53 AM IST
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