Best Equity Funds To Invest In 2022

While investing in equity mutual funds based on market capitalisation, an investor can choose from large, mid, small, multi, and flexi-cap mutual fund schemes. These schemes have been designed for a specific category of investors with a certain risk profile. This blog will focus on how to invest in the best large-cap equity funds in 2022.

What are large-cap mutual funds?

The first one hundred companies (rank 1^st to 100^th) in terms of market capitalisation are known as large-cap companies. As per SEBI guidelines, a large-cap mutual fund scheme is an open-ended scheme that predominantly invests in large-cap stocks. The scheme has to invest a minimum of 80% of its total assets in equity and equity-related instruments of large-cap companies.

Best large-cap mutual funds to invest in

The above table shows that large-cap mutual fund schemes have performed well in the last five years and have given good returns. The top five funds have given a 15% to 18% CAGR return, which is a good return.

Who should invest in large-cap mutual funds?

All equity mutual fund schemes are risky. However, large-cap mutual fund schemes are relatively less risky than mid and small-cap mutual fund schemes. An investor who wants to invest in equity mutual funds but with a relatively lower risk than other equity mutual fund schemes can invest in large-cap mutual funds.

Large-cap mutual fund schemes invest in large-cap companies, most of which are among the top companies in their sector. They have grown well in the past with good profitability. They usually have a good track record of consistent dividend payments. When the overall market is falling, usually, large-cap companies fall less than mid and small-cap companies. Similarly, when the overall market is recovering, usually, large-cap companies recover faster than mid and small-cap companies.

Taxation of large-cap mutual funds

From a taxation point of view, any mutual fund scheme with a minimum of 65% of its total assets in equity and equity-related instruments is classified as an equity scheme. Large-cap funds are treated as equity funds and taxed accordingly.

1. Short-term capital gains (STCG) tax: If you sell your large-cap mutual fund units within twelve months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) tax will be levied at 15%.
2. Long-term capital gains (LTCG) tax: If you sell your large-cap mutual fund units after twelve months of purchase, the capital gain will be classified as long-term capital gain (LTCG). Every financial year, the first Rs. 1 lakh long-term capital gain will be exempt from taxation. The incremental long-term capital gain above Rs. 1 lakh will be taxed at 10%.

Risks involved in large-cap mutual funds

As mentioned earlier, all equity mutual funds are risky. There was a broad market sell-off during events like the subprime crisis (2008-09) and the Covid-19 pandemic (2020). The broader market indices such as the BSE Sensex 30 and the NSE Nifty 50 had seen falls of around 50%. During that time, the NAV of the large-cap mutual funds had also seen a fall of 50%. 

Subsequently, the markets recovered and went on to make new highs. During that time, the NAVs of large-cap mutual funds also saw a smart recovery and gave good returns for investors.

Return potential of large-cap mutual funds

In the earlier section, we have seen how the best large-cap mutual funds have given 15% to 18% CAGR returns in the last five years. These are very good returns. Equities have the potential to give inflation-beating high returns in the long run.

In the long run, large-cap mutual funds can benefit from the power of compounding and generating wealth for investors. Large-cap companies have a more stable business model than mid and small-cap companies that are emerging. Large-cap companies have a proven track record of profitable growth with consistent dividend payments. Large-cap companies have generated wealth for their investors in the past and have the potential to continue doing so in the future as well. Hence, large-cap companies are also known as blue-chip companies, and large-cap mutual funds are also known as blue-chip funds.

Advantages of large-cap mutual funds

Some of the advantages of large-cap mutual funds include:

1. They invest in India's top 100 companies by market capitalisation. Most of these companies are among the leaders in their sectors or categories. These companies have a proven track record of high sales growth, superior profit margins, consistent dividend payments. Such companies are known to give good returns to investors and create wealth for them.
2. Large-cap mutual funds invest in the top companies across various sectors, thus providing the benefit of a diversified investment portfolio to their investors. An investor needs to diversify their portfolio to reduce the risk.
3. While all equity mutual funds are risky, the advantage of investing in large-cap funds is that they are relatively less risky than mid and small-cap mutual funds.

Reasons to invest in large-cap mutual funds

Some of the reasons to invest in large-cap mutual funds include:

1. Potential to generate inflation-beating high returns
2. Opportunity to invest in India’s blue-chip companies
3. Opportunity to invest in a diversified investment portfolio of companies belonging to various sectors

To start investing in large-cap mutual funds as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.