| July 13, 2021
Best Large Cap Mutual Funds 2021
Large Cap Mutual Funds, is a type of mutual fund which according to SEBI, invests in the top 100 companies.
Things to Consider as An Investor
RISK: Market risk exists in large-cap equity funds, but it is moderate. They are known for generating consistent dividends and wealth accumulation. The money is invested in financially strong businesses, the underperformance is averaged out over time which provides stability.
RETURN: Large Cap Funds do not perform erratically as they have a history of strong performance during both market lows and highs. The risk exposure is comparatively less for these funds, therefore the returns on them are less volatile.
INVESTMENT HORIZON: These funds are suitable for investors with a long- term horizon. Typically, the fund underperforms during market downturns, but returns in the 10% to 12% range over the long term of more than seven years.
FINANCIAL GOAL: They are perfect for an investor who wants to take on a moderate amount of risk. These funds can be used to build wealth for retirement planning, or to fulfill your house loans, to plan for children’s weddings etc. These funds can also be used to establish a portfolio for new investors who want to get into the stock market but are concerned about risk.
CAPITAL GAIN TAX: One of the other advantages of investing in Large Cap Funds is that investor is subject to capital gains. Capital gains on such investments are tax-free as long as they don't exceed Rs. 1 lakh. Long-term capital gains that surpass Rs. 1 lakh are subject to a 10% tax. Short term capital gains (when money is withdrawn in less than 1 year), are subject to 15% tax.
Now let us take a look at the top 8 Large Cap Funds
These funds invest in companies that have market Cap of more than 20000 crore. It also shows us the returns generated by these funds across 1,2 and 3 years. Let’s take the example of Mirae Asset Large Cap Fund to show the returns we can expect based on historical data.
MIRAE ASSET LARGE CAP FUND
The above table shows us the value of a Rs 1000 SIP started on 1 April 2018. Suppose we invest 1000 every month for 1 year up till 1/3/19. This SIP gives 49.19% absolute returns and an annualised return of 14.27% in 3 years up till 1/4/21. The SIP reaches a value of 17903.17 with just 12000 invested!
Now suppose we instead choose to invest via lumpsum. The value of lumpsum investment of 10000 after 3 years is 16016.13. Thus, the lumpsum gives us a 60.16% absolute return and a 17% annualised return in just 3 years!
It also shows us the risk ratios associated with these funds. For example, Mirae Asset fund has an alpha of 18%. This indicates that it outperforms its expected returns (based on its portfolio) by 18%. The Sharpe Ratio of 0.56 indicates a 56% risk adjusted return for the fund. Its beta of 0.97 means that for every 1 point of deviation in its benchmark index (usually Nifty 50), we can expect the portfolio to move by 0.97 points. The standard deviation of 20.98 indicates the volatility of the returns around its average 17% return. Thus, these ratios must be studied over time and across funds to choose the correct fund for your own risk profile and financial goals.
Another example of Large Cap Mutual Fund with a horizon of 5 years, we have taken ICICI Prudential Blue Chip Fund.
This example shows us an important aspect while investing in mutual funds. Notice how the 2 year value of our SIP is less than the 1 year value. It shows us that there are risks associated with investing in mutual funds. However, over the long run these tend to average out, and in 5 years we can see again that our investment is generating healthy returns. This is the advantage of long-term investing! The investment almost doubles in value to 22504.86 after 5 years, generating absolute returns of 87.54%. The annualised returns rises to 13.4%.
Again, the lumpsum amount follows the same pattern as the SIP, dipping initially before recovering over the 3 and 5 year periods. The lumpsum reaches a value of 19965.35 after 5 years, generating absolute return of 99.65% and an annualised return of 15%.
The ratios for this fund are shown above. As we can see, the fund has a slightly lower beta and standard deviation than Mirae, which indicates slightly less risk in this fund. However, the alpha of this fund is negative, which tells us that the fund is underperforming its expected returns. Thus it is important to consider your own risk profile and goals while investing in the correct mutual fund. Finally, we’ll look at Axis Bluechip Fund to see the effect of investing for 10 years.
Over 10 years, we can start seeing the effects of compounding. Our investment corpus of 12000 has more than tripled in value during this period to 39328.53, with an annualised return of 12.6%. Thus you can reap these benefits by staying invested for longer periods of time.
The lumpsum value more than triples in 10 years as well, reaching an amount of 34673.57 by the end of 10 years. This shows us the power of compounding.
Again, we can see from the ratios that Axis Blue chip has a lower beta and standard deviation as compared to the previous 2 funds, indicating the presence of slightly lower risk in the fund. It thus has better risk adjusted returns than the other 2 funds, despite slightly lower absolute returns. The alpha of the fund indicates that it is beating its benchmark.
This article showed us various time horizons that an investor can consider while investing in large cap Mutual Funds with two different methods of investing, lumpsum and SIP. We saw how different funds have different risk and return profiles using ratios and investors must consider this carefully before investing.