An Eye on Large-Cap Funds

In the past 12 months, mid-and small-cap stocks have registered significant gains. As a result, valuations are becoming less attractive relative to large-cap stocks.  

In such a scenario, an investor should focus on incremental allocation to large-cap funds.  This way, an investor can diversify their investment portfolio to act as a hedge against a possible market correction in mid-and small-cap stocks.

Generally, large-cap stocks are known to be relatively stable in the long run. This ensures that the overall portfolio of an investor remains well-balanced. In addition, as investors raise their investment horizon, the power of compounding comes into effect for building of a suitable corpus. 

Experts are of the opinion that investors can look forward to favourable returns from large-cap companies considering their substantial market capitalisation (m-cap), making them resilient in the face of economic dips.

Large-cap valuations continue to be attractive, and investing in large-cap stocks via a Systematic Investment Plan (SIP) for a timeframe of three to five years could be regarded as a relatively suitable strategy. 

As a rank beginner in the equity market, an investor should kick-start their journey with large-cap funds via SIP in order to test the waters. On gaining confidence in the market and getting a hold of market behaviour and other aspects of investing, such investors could look forward to diversifying into mid-and small-cap stocks.

In case a first-time investor chooses to invest in mid- and small-cap funds via SIP, they can consider allocating a significant portion of funds to large-cap investments at an initial stage. On gaining knowledge related to understanding mutual funds and investment strategies, the gradual focus should be towards increasing allocations to mid- and small-stocks, though. 

Experts say that though the key focus of an investor should be on maintaining a balanced portfolio approach, the difference in returns is quite large. Also, once a large-cap fund is held for a timeframe of six to eight years, the probability of negative returns comes down dramatically. 

There is a possibility that earning alpha, which is the excess returns an investment has generated against a benchmark, becomes tougher in large-cap funds as compared to mid- or small-cap funds, maintain experts.

However, an investor can look at a multi-cap fund or flexi-cap fund in this regard. These categories of funds are known to automatically combine small-, mid-, and large-cap stocks and have performed better than large-caps on Compound Annual Growth Rate (CAGR) returns.