What Are Large Cap Mutual Funds?
When it is about equity investment, it is natural for investors to look for investments consistent in their performance with reasonable stability over a period of time. In such a scenario, investors tend to prefer investing in large-cap mutual funds.
What is a Large Cap Fund?
As per the SEBI Guidelines, a large-cap fund invests a minimum of 80% of its net assets in equities and related instruments of large-cap companies. Such companies are identified based on their average market capitalisation, which is calculated by multiplying the market price of the share and the total number of equity shares issued by the Company.
Large-cap companies are the top 100 companies in terms of full market capitalisation. As per the latest list published by the Association of Mutual Funds in India (AMFI) as of June 30, 2021, the cut-off for being classified as a large-cap company was the market capitalisation of Rs. 37,747 crores (100th company by market capitalisation).
Investors prefer large-cap companies due to their fundamental strength and capability to absorb minor hiccups in an efficient manner. This becomes possible as large-cap companies tend to grow over a period with a proven track record of performance and are generally among the industry leaders, large conglomerates, etc. As such, these companies may also enjoy a higher confidence and trust value amongst the investors.
Due to the relative stability in the performance of large-cap companies over the long term, such funds are more suitable for investors, who would want to build a fair share of equity or core equity holdings within their investment portfolio. However, investors should have a long-term investment horizon while investing in any equity funds. It helps them navigate short-term volatility in the equity markets. The investors can invest in large-cap funds in lumpsum or through Systematic Investment Plans (SIPs).
Owing to their inherent benefits, such funds enjoy the largest market share of 17% amongst all the open-ended equity funds with an AUM (Assets Under Management) of Rs. 2.12 lakh crores as of August 31, 2021 (Source: Association of Mutual Funds in India – AMFI).
Taxation on Returns from Large Cap Mutual Funds
As large-cap funds invest at least 80% of their net assets in equity shares and equity-related instruments of large-cap companies, such funds are categorised as equity-oriented mutual funds for taxation purposes as well. Accordingly, the gains are taxed as Short-Term Capital Gains (STCG) at the time of redemption if the investors have held the investments for less than 12 months. If the investments are held for 12 months or more, the gains are taxed as Long-Term Capital Gains (LTCG).
As per the current tax laws, STCG is taxed at 15% (plus surcharge and cess), while LTCG is taxed at 10% (plus applicable surcharge and cess) without any indexation benefit. The taxable gains are calculated directly by deducting the investment cost from the redemption proceeds. However, the investors can also exempt Rs. 1 lakh every year for LTCG from equity shares and equity-oriented mutual funds in aggregate.
Any income distributions from equity funds, if any are taxable at the regular tax rates applicable to the investors. Additionally, income distributed by mutual funds are also liable for tax deduction at source (TDS) at a rate of 10%.
So, while equity markets may be volatile over the short term, large-cap funds may reflect more resilience, particularly during adverse macroeconomic events due to their sheer size and strong fundamentals. As such, retail investors may consider boarding the investment journey with large-cap funds.
Note: As mentioned in the article, the tax provisions are for illustrative purposes only and are updated as per the Union Budget 2021 passed by Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.