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Returns greater than a year are annualized (CAGR).


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What is a large-cap fund?

SEBI defines large-cap funds as Mutual Funds with a minimum 80% of total assets invested in equity & equity related instruments of large cap companies. In simple terms, large cap funds are funds that invest more than 80% of their total NAV in Equity & Equity related instruments of large cap companies. Stocks are also categorized based on market cap. The 1st to 100th biggest companies in terms of market capitalization are large cap stocks. You can see all the large cap stocks in India here. The 101st to 250th companies are mid cap stocks. The 251st companies onwards are small cap stocks. So to put it all together, Large Cap funds are a type of mutual fund that invests more than 80% of all its assets in the top 100 stocks based on market capitalization. These funds on an average give about 10-12% returns every year. There are currently 33 large cap funds in India. You can see the list of all large cap funds here.

How do large cap funds react to the rise and fall of the markets?

All large cap funds have mostly big and stable companies in their portfolios. When the market falls, large cap funds generally don’t fall as much as the market. This is because the sheer size and manpower of these companies help them stay afloat in any market condition. They also have more resources when compared to other small and mid cap companies to help them through tough times. Because of this, large cap funds help cushion the blow from any market downturn as they don’t fall as much as the market. However, in the reverse scenario, when a market goes up, these large cap funds tend to lag behind other categories as they do not pick up momentum as easily as the smaller companies.

What’s the current scenario?

Here’s an excerpt from our article on why large caps are losing their appeal:

One, the number of funds beating the Nifty 100 TRI is going down. Only a tenth of the category beat the Nifty 100 TRI on a 3-year basis. Two years ago, funds’ 3-year returns beat the benchmark 75% of the time. Even on a 5-year basis, funds are struggling to deliver above index. The marked underperformance in the past two years has pulled down longer-term returns as well.

Two, the margin by which funds beat the benchmark is shrinking. Over 2015, for example, the average margin by which funds’s 1-year return beat the Nifty 100 TRI was a good 6 percentage points. Over the past two years, a majority of the funds underperformed the index. Those that outperformed managed to beat the index by just 1-2 percentage points, barring a couple of outliers.

Three, the proportion of times funds beat the benchmark is also going down. That means there is a higher chance that a large-cap fund you bought may underperform the index. On an average, large-cap funds beat the Nifty 100 TRI just 24% of the time when 1-year returns were rolled daily for 3 years and just 35% of the time when 3-year returns were rolled daily for 3 years.

If you hold underperforming large-cap funds already, don’t immediately exit them. Instead, reduce SIPs in these funds. Add index funds or increase exposure to moderate-risk multicap funds.

What kind of investor does it suit?

Large Cap Funds are most suited for long term investors looking to invest for a period of 5-7plus years. This timeframe is set to allow the stock to compound. These types of funds provide stability to the investor’s portfolio. This does not mean that there won’t be any negative returns. Stay invested for the entire time frame. Large Cap funds are better suited to investors looking to prevent capital erosion first and seek additional returns next. In terms of risk, these funds have slightly lesser risk when compared to other more volatile funds and may be preferred by investors seeking lesser risk.

How are large Cap funds taxed?

Large Cap Funds are taxed exactly the same as other equity funds. If you buy some units of a large cap fund and sell them in under a year, you will be taxed 15% of all the profits you made from that fund. If you buy some units of a large cap fund and sell them after one year, you will be taxed 10% of all the profits you made from that fund. 

In simpler terms, 

The Short Term Capital Gains Tax (STCG) for profits under 1 year of large cap funds is 15%.

The Long Term Capital Gains Tax (LTCG) for profits after 1 year of large caps funds is 10% (without any indexation benefits).

Long Term Capital Gains Tax is also exempt upto capital gains of upto ₹1 lakh just like other equity funds.

General Disclosures and Disclaimers

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