Fundamental investments are the mainstay of one’s portfolio. Ideally, this provides stability and facilitates achieving your long-term financial goals, such as retirement or sponsoring a child’s higher education. Core portfolios are rarely churned out — as it ensures the safety of goals in most circumstances — even if some risky investments may not perform as expected. Can Large Cap Equity Funds Be the Core of Your Investment Portfolio? Let’s assess:
First assess your need for risk
In the beginning, find out the risk requirement. Find out the required rate of return on your investment portfolio to meet your financial goals. If you have enough time to achieve the goal but need higher returns, your investment portfolio should carry the same risk.
For example, if you aim to retire with a corpus 5 crore by 2040, can save more 12 lakhs per annum, so you need a return of 8% per annum. This required rate of return will, in turn, define your asset allocation and risk appetite.
With the expectation of an average return of around 6-7% annually, a loan asset alone cannot help you achieve your goal. How does your investment reach the 8% return limit? This is where equity comes into play. Historically, equities as an asset class have delivered the best inflation-beating returns of over 12-14% annually over the long term. You can get there by calibrating your asset allocation in favor of equity. So, first of all check whether your asset allocation demands equity in your portfolio.
There are two benefits of having large cap equity funds in your portfolio. One is stability and the other is wealth creation.
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Large cap equity funds are a stable investment option within equities. They essentially invest in the stocks of companies with the highest market capitalization which are usually market leaders in their business, and are more resilient during business adversities. Large cap companies like TCS, Reliance and HUL have been in business for a long time.
Large cap investing ensures that your portfolio does not become too volatile due to market uncertainties. Large-cap stocks have proved to be the best bet during bear market times. In 2008, when the global financial crisis rocked the equity market, the BSE 100 was down 55% compared to 67% and 72% for BSE Midcap and BSE Smallcap respectively. Their volatility of annualized returns (measured by standard deviation) was also the lowest among the equity sub-assets.
What about long term returns?
Equity investors with an investment horizon of seven years will never lose 97% of their money, shows data on rolling 7-year returns for equity indices BSE 100 (Largecap), BSE Midcap and BSE Smallcap since 2003. And if they were in large caps, investors would not have lost money at all and, in the worst case scenario, would have earned a CAGR of 3.7% as against 0.8% and -2.6% for mid cap and small cap respectively.
Since 2003, the BSE 100 has given an average seven-year rolling return of 10.9%, compared to 11.1% for BSE Midcap and 9.9 for BSE Smallcap. Providing the best downside protection, large cap equity indices also stack up well on returns. Thus, large cap equities arguably offer the best risk-adjusted returns.
selection required
Large cap equity funds diversify investments across various stocks and industries, thereby providing the best potential for returns and stability. As per SEBI (Securities and Exchange Board of India) guidelines, large-cap equity funds should invest at least 80% of their corpus in large-cap stocks.
However, as per our analysis, only 30% of large cap equity funds outperformed the BSE 100 TRI returns in the last five years. Hence, it is not just about investing in large cap funds but also choosing the right fund using various performance (risk and return) measures. From first-time investors to those looking to build long-term wealth, large cap equity funds offer the needed stability, diversification and the ability to earn inflation-beating returns. So make it a part of your core portfolio.
Anoop Bansal is the Chief Business Officer at Scripbox.
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