One of the popular investment schemes, mutual funds can be classified into several other categories. One of those types is equity funds. They are a type of mutual plan in which the investor invests in the stocks of different organisations. These investments are made by keeping the investment objective of the underlying scheme in mind. Equity funds are known for attracting investors thanks to their potential for long term wealth creation as it also has great options for capital appreciation. Those who are seeking exposure to the stock market and want to invest for the long term can opt for equity funds. Equity funds themselves can be classified into large-cap funds and small-cap funds. And if you want to know which of these two are suitable for you, continue reading below:
- Large-Cap funds:
Large-cap funds are the type of equity funds that are known for investing a big portion of their assets in businesses that are known for having large market capitalisation. These companies are known for their reputation for generating big returns for their investors over a long period. Known for generating stable and comparatively steadier returns, large-cap funds are ideal for you if you are searching for a long-term investment option that will provide you with a regular compounding of wealth. Here are some of the major benefits and cons of large-cap funds:
Benefits of large-cap funds:
- Assured capital growth: As stated previously, assets are invested in companies that are reputed. So, by opting for large-cap equity funds, you can rest easy knowing that you will enjoy good returns on your investment.
- Your investments can be diversified: Usually, large-cap funds are managed by research analysts and fund managers. What they do is invest your asset in different sectors, ensuring that the risks are minimised, and the returns are both stable and good.
- They offer stable returns: Another major advantage of this type of equity fund is that it will provide stable returns to the investor regardless of the market condition. Thus, investors seeking long-term wealth accumulation tend to prefer large-cap mutual funds.
Cons of large-cap funds:
- Comparatively low returns: In comparison to a small-cap fund, large-cap funds provide stable but low returns. As the investor takes a risk by investing in a business in small-cap funds, the returns are much higher there.
- Less ownership: When you opt for a large-cap equity fund, you won’t have a say in how much money can be invested and when to do it. All the decisions are taken by the fund managers.
- Not suitable for short-term investments: In stark contrast to small-cap funds, this kind of equity fund is ideal if you want to acquire capital in the long term rather than in the short term.
- They are not suitable for risk takers: If you are a kind of investor who wants to take risks in lieu of high returns, you would not like large-cap funds because they provide stable returns. Moreover, if the market is growing, you can’t enjoy additional income.
- Small-cap funds:
Small-cap mutual funds are known for primarily investing in stocks of companies whose market value is less than ₹5,000 crore. The returns on a small-cap fund are impacted by the conditions of the market. Here are some of its advantages and disadvantages:
Benefits of small-cap funds:
- Offers growth potential: A small-cap fund’s major advantage is that it has immense growth potential. That’s because these small-cap businesses are known for having aggressive expansion strategies. The said strategies can help businesses to grow exponentially over time.
- They can outperform other equity funds: As stated earlier investors take a huge risk by investing in a small-cap fund. So, when a small-cap business is performing well, its investors are rewarded in a better way.
Cons of small-cap funds:
- Volatile: In comparison to large-cap funds, a small-cap fund is a huge risk. Since this kind of investment exposes itself to low performing equities. Say, you invest in a small-cap business, and it isn’t performing well. Then, you will also be incurring losses.
- They are suited for risk-taking or seasoned investors: If you are looking for an option that offers stable returns, small-cap equity funds are not for you. This type is suitable for someone who is okay with taking calculated risks.
So, if you are wondering which one you should choose between the safe and secure large-cap funds or the risky small-cap fund, the right answer is somewhere between. To put it simply, you can opt to invest in both large and small-cap funds. In case you are having doubts, please get in touch with a fund manager to get them answered.