Why must you include large cap funds in your portfolio?

by readyrewind
Why must you include large cap funds in your portfolio

When it comes to creating a successful financial portfolio, having the right mix of investments can make all the difference. Many investors’ portfolios suffer from too much risk and not enough diversification because of being unable to choose funds with the right risk/reward balance, focusing on either pure equity or debt investments, when formulating their investment strategy. 

Investing for the future isn’t just about choosing stocks and bonds; it’s about understanding the fundamentals of a well-constructed portfolio. A key component for a balanced investment strategy is including large-cap funds in your portfolio. These equity funds invest 80% of their total corpus in top 100 companies listed in the stock markets by market capitalisation, thus offering a unique combination of balance between relative safety and potential reward. 

Let’s explore why large-cap funds are crucial for any portfolio, discussing their impact on risk assessment, diversification strategy, and overall returns.

  • Diversification with well-established companies at a low cost

When you invest in large cap mutual funds, you can spread out your risk across multiple sectors and industries of blue-chip companies with one fund. This helps reduce the impact that any one industry or sector may have on your overall returns and helps protect against sudden changes in market conditions due to macroeconomic events or political issues. In addition to providing diversification benefits, large cap funds can also help offset losses from other investments if the overall markets take a downturn.  

  • Growth potential to fuel long-term goal

Large-cap mutual funds can be a valuable asset for individuals with long-term financial goals. These funds offer stability and consistency, the type of reliable return needed to meet those ambitious targets such as retirement savings, wealth accumulation, and children’s college tuition plans or wedding expenses. However, these benefits may only be realised if you are willing to dedicate the necessary long-term focus required to succeed in investing in large cap funds.

  • Dividends and bonus shares for capital appreciation over time 

Many large-cap companies also offer dividends or bonus shares as part of their investment packages. Dividend payments are usually issued quarterly or semi-annually while a small few pay monthly also. It can provide additional income while you wait for your fund’s value to appreciate. Bonus shares give investors extra shares based on the number of shares they already own in a company. These shares can then be sold or traded anytime, allowing to capitalise on gains when extra cash is needed. 

  • Researching and analysing a large cap fund is comparatively easier 

When it comes to researching and analysing stocks, plenty of information is available about large caps since they are well-established companies with strong track records. This makes it easier to evaluate their financials, management teams, industry trends, etc. Furthermore, most blue-chip companies have regulative bodies that ensure that all operations are carried out in a transparent manner with proper corporate governance in place. Thus, including a large cap mutual fund in your portfolio is often recommended, as it mitigates the risk of loss associated with unstable investments.

Final words

With diversification, access to blue chip companies, and potential to earn inflation-beating returns as its key features, allocating some portion to large cap funds in your portfolio can be a wise decision. To combine these benefits with disciplined budgeting and lower risks, it is beneficial to opt for SIPs and use an online SIP calculator beforehand to calculate return projections of different SIP plans. This approach can further help you create a cost-effective financial planning strategy and build up a portfolio with long-term growth potential.

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