Every investor has one prime objective – to earn stable returns. However, navigating market fluctuations can be challenging even for seasoned investors, which is why diversification of your portfolio is so important. Asset allocation enables you to balance the risk-reward dynamic and take advantage of the strengths that equity, debt, and cash holdings offer.
Investors often wonder which category to choose within equity mutual funds: large-cap, medium-cap, or small-cap stocks. Before discussing why investors prefer large-cap mutual funds over the other two, let’s understand the differences between these three categories.
- Large-cap funds are equity funds that invest in companies with a market capitalization of over Rs. 20,000 crores. These are companies that are renowned, reputed, and tend to dominate the industry. They are a trusted name based on their market performance and the ability to remain stable through tough times like recessions.
- Mid-capmutual funds invest in companies with market capitalization between Rs. 5,000-20,000 crores. While they are also quite reputed and have high growth potential, they tend to be volatile compared to large-cap companies. However, because they can cross over to large-cap, investors consider them attractive for investment.
- Small-cap funds invest in companies with market capitalization lower than Rs. 5,000 crores. As the name suggests, they are smaller in size, making them risky for investment due to the low probability of long-term success. However, this also means they have the highest growth potential of all three categories.
While large-, medium-, and small-cap equity mutual funds have their strengths and weaknesses, most investors gravitate towards large-cap funds for the following reasons:
It’s no secret that investors are attracted to stability. Large-cap companies are well-established and heavily relied upon by consumers. Therefore, the probability of insolvency or massive reductions in the revenue generation is relatively low. On the other hand, mid-cap and small-cap companies cannot boast the same level of stability and thus are considered riskier investments.
- Dividend payments
Because of their maturity in the market, large-cap companies often have the power to make steady dividend payouts to investors, making them more predictable and low-risk in terms of returns. As these companies have a stronghold on the market, they can afford to distribute their profits among investors. This makes large-cap mutual funds the best option for investors with low-risk appetites whose objective is to gain stable returns.
Large-cap companies are often leaders in their respective industries. As a result, growing numbers of investors and creditors expect relevant information related to their activity, such as profitability and financial statements, to be easily accessible. You can combine this knowledge with historical and current performance to determine the risk-reward potential more accurately.
It’s also worth noting that large-cap mutual funds have higher liquidity, which means you can trade shares freely without affecting the stock price, unlike in mid-cap and small-cap funds. Therefore, if you’re looking to make a lump sum or SIP investment in equity funds, begin with large-cap funds before diversifying your portfolio. If you want to know Why Investing in Small-Cap Is Riskier, Click Here. You can quickly start your investment inmutual funds through a verified and well-reviewed online investment app, such as Tata Capital Moneyfy App, without worrying about paperwork and gaining instant access to the funds of your choice.