What are Large Cap Funds?

To invest in equity mutual funds there is no such thing as an ideal time. Best way to enter is through a Systematic Investment Plan (SIP). One of the advantages of investing through SIP for the long-term is it adjusts the "returns" and "cost of purchase" during volatile times.

InvestmentYogi helps us understand parameters an investor needs to consider before investing in any large cap fund. These pointers would help one make an informed decision and not be fooled by a mutual fund agent selling non-performing schemes as superior large cap funds to invest:

1) ‘Investment Objective' of the fund - The most important document an investor needs to understand is the KIM (Key Information Memorandum) of mutual fund scheme. Investors are expected to clearly know the ‘investment objective' of the MF scheme. A KIM will also provide other relevant information such as total funds under management into equity and debt scheme, portfolio composition, expenses, etc.

2) Tracking performance of the fund - Investor needs to analyze the historical returns of the scheme with benchmark index such as Sensex or Nifty. If the fund's returns are outperforming consistently in last 3 to 5 years then investor may consider it as a good sign to invest. Past performance is not a guarantee of future returns. However, a MF scheme performing consistently well even during volatile times (such as the financial crisis of 2008) can be considered as a good buy.

3) Analyzing risk of fund - An investor needs to first identify his/her risk appetite before investing in a mutual fund. For this reason, one must clearly understand the investment objective of the MF (mutual fund) scheme and whether it is in line with one's risk appetite.

Investors with a long investment horizon and/or low-moderate risk appetite may consider large-cap mutual funds.
An investor can analyze the risk of a MF scheme through various statistical measures. Such information can be easily viewed from MF research reports and/or financial websites.

4) Diversification is an ideal policy -Another key parameter an investor needs to emphasize on is diversification of their investment amount. It is wise to know the portfolio composition of the MF schemes debt and equity proportion, sector-wise proportion, and investment holding in each company. Also, a fund needs to invest across 20 to 30 companies from different sectors. This is considered as ideal portfolio for any scheme. For example, if a fund has investments in only 6-12 stocks than it is considered a risky investment and an investor should avoid investing in such funds. A portfolio of a scheme is said to be over-diversified when there are stocks from more than 75 companies. Such over-diversified schemes should also be avoided because this makes it difficult for fund manager and his team to track individual stocks.

5) Background of Fund Manager - It's important to know who is handling the fund of a particular scheme. Fund managers are professionals having the requisite qualifications and experience to manage your money. But, it's necessary to have background check of schemes they have handled earlier and what were the returns/ performance of those schemes before investing.

6) Cost - There are no entry loads to invest in mutual funds. But, investors have to pay fund management fee and administrative charges on an annual basis. These two charges together cannot exceed 2.5 % of the fund's assets, as specified by SEBI. As discussed earlier investors need to go through KIM/offer document before investing to know any hidden charges specified, such as early redemption charges, etc. There will be an exit load specified in the KIM/offer document which also needs to be considered before investing. The charges are almost similar across the similar MF schemes.

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