Companies are divided broadly into three according to market capitalisation. The top companies with the highest market caps come under the group of large-cap companies. Below them are mid-cap companies. They don’t have a market cap as big as large-cap companies, but neither are they too small. And at the bottom, there are small-cap companies. They have a minor market cap and are also higher in number.
All these market cap groups have different features as well. For example, small-cap funds have the most growth potential and sometimes showcase the highest profit. However, they come with a similar-sized risk as well.
But if you are an investor looking for stability in your portfolio, a large-cap fund with large-cap companies as its main portfolio component might be a suitable choice. Let us know why.
What are large-cap funds?
As we have said above, large-cap companies have the highest market capitalisation. That means they have a proven track record of continuous growth. Most of the large-cap companies also have a steady growth. However, as they could be near their growth threshold, they might not show vast signs of growth. At the same time, their prices may not go down significantly too.
Large-cap funds are the ones that have these large-cap companies as their focus. As a result, the lion’s share of their portfolio may be filled with shares of such companies. Hence, large-cap funds show characteristics similar to that of large-cap stocks.
Now, let us take a look at the advantages that come with investing in a large-cap fund.
Advantages of investing in a large-cap fund
Stability- This is the same factor that we have discussed above. When a company is big enough, it already has proven business plans and a working method. That means slight changes in the market sentiments might not affect them a lot. Even massive trend changes could have a smaller effect on a large-cap company’s stocks. But this could work in both ways.
During a period of bearish trends, the stability may protect the stock’s price from falling. At the same time, during a bullish time, the stability may cause the price to not rise in accordance with the rise in the stock market. But if you are a risk-averse investor looking for stability, large-caps funds become an excellent option.
Easy to understand and research
Since large-cap companies have been operational for years, their functioning method may be proven and transparent. Furthermore, as an investor, you have years of data to use for research before you invest in one. This makes it easier for you to study the stock before you invest.
Liquidly is a crucial factor to consider before investing in a stock. Higher liquidly ensures you can sell off your stocks anytime without any problems. Large-cap companies have the highest liquidity as they could have a lot of buying interest even when their stock prices are decreasing. This ensures that you are never stuck with a large-cap fund, unable to sell it off.
Diversification is one of the critical elements a portfolio should have. Large-cap mutual funds offer the same by default. This is because, unlike investing in large-cap stocks directly, a mutual fund always ensures the portfolio is diverse in some way. Here, although the majority of the portfolio might be reserved for large-cap stock, there would still be space for other market cap stocks as well.
Large-cap funds are a good option for you if you are a conservative investor. However, make sure you figure out your investment goals before investing for the best results.