What is equity fund?

An equity fund, also known as stock funds is a type of mutual funds that primarily invests in stocks. There are various types of equity mutual funds – large-cap fund, mid-cap fund, small-cap fund, sectoral funds, index funds, and Equity-Linked Savings Scheme (ELSS).In this article, we’ll focus on large-cap equity fund.

What is a large-cap equity fund?

Large equity funds are mutual funds that invest a substantial proportion of their corpus in companies with a huge market capitalisation. These companies are highly reputable and constitute the top 100 companies when it comes to capitalisation. These companies hold an excellent track record of generating desirable returns for their investors over a long period. Examples of such companies include Reliance industries, Microsoft, Apple, Facebook, etc.

Who should invest in large-cap equity mutual funds?

Large-cap equity funds are an ideal investment avenue for those investors who yearn to take advantage of equity mutual funds but also don’t wish their returns to fluctuate more than the benchmark. These equity funds are ideal for risk-averse investors who want equity exposure to high-quality shares and have a long-term investment goal.

Factors to consider before investing in a large-cap equity fund

  1. Risks
    Large-cap funds are subject to market risks. However, these risks are quite moderate. As compared to mid-cap equity funds and small-cap equity funds, the Net Asset Value (NAV) of a large-cap equity fund tend to fluctuate less.

  2. Returns
    Returns on mid-cap equity funds are generally lower than small-cap and mid-cap equity schemes. Since large-cap schemes provide stability to your portfolio, investors receive stable returns on these investments.

  3. Expense ratio
    Similar to other types of mutual funds, these funds also charge a fee for managing your mutual fund investments, known as the expense ratio. The Securities and Exchange Board of India (SEBI) has mandated that fund houses cannot charge an expense ratio higher than 2.5%. However, since most large-cap equity funds produce lower returns as compared to small-cap or mid-cap schemes, you should look for a mutual fund scheme with a lower expense ratio to help you maximise your returns on investments.

  4. Investment horizon
    Usually, the scheme experiences a lot of underperformance when the markets are slump. However, since the capital is invested in financially strong companies, the loss averages out in the long-run. Hence, Large-cap funds are suitable for those individuals who have a long-term investment horizon.

  5. Tax
    The rate of taxation on large-cap equity funds depends on the holding period or the period for which you stay invested. When you redeem your investments, you earn capital gains. STCG is taxed at a rate of 15%. LTCG over Rs1 lakh is taxed at 10% without the benefit of indexation.

If you are a beginner or a risk-averse investor, then large-cap investment funds may be for you. Some investors prefer these funds  for the long tenure while others enjoy the lower risks. Whatever may be the reason, invest in mutual funds considering your risk profile, financial goals, and investment period. Happy investing!

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