A lingering question in a millennial investor’s mind would be- Should I shift from large-cap mutual funds to index funds? Read on to find out
You’ve probably figured out the benefits of mutual funds and have (hopefully) invested your money in them too. However, with the new SEBI regulations kicking in, you might wonder if it’s wise to stay invested in large cap funds or make the switch to index funds. Fret not! We’re here to help. Let’s begin with the basics
In layman terms, large cap mutual funds are funds which invest a larger proportion of your corpus (almost 80%) in companies with large market capitalization. Most of these companies are reputable, trustworthy and strong in the financial market. What are index funds?
Contrary to large cap mutual funds, index funds or exchange-traded funds are those mutual funds that are designed to follow a few predefined rules, so that the fund is able to track a specified basket of underlying investments. These funds are passive in nature, offer wide market exposure with less operating costs and have a portfolio turnover that is low. Hence, there is no fund manager risk.
Now the question arises- Which fund performs better- large cap mutual funds or index funds?
Both kinds of funds have their own fair share of benefits that help them become a preferred choice among a number of investors. However, when it comes to large cap funds, there are a more than one reasons for financial planners to believe that it would not be
possible for fund managers to generate the additional alpha that these funds provide.
One reason to back this claim is that large-cap funds are constrained, as they need to allocate almost 80% of their portfolio in the top 100 stocks by market capitalisation, now that new SEBI categorisation norm has become applicable. Moreover, the expense of actively managed funds might eat into the returns generated.
On the contrary, with index funds, there is no such compulsion of allocating a specific percentage of your fund in a company. These funds invest in companies listed on indexes such as Nifty50 or Nifty 100 or BSE. As the companies’ stock may be volatile, investors with more risk taking capacity can opt for these mutual funds and earn reasonable returns.
Large cap mutual funds have been a preferred choice for traditional investors. However, millennials are trying to experiment with index funds as the risk involved is more and hence, the returns may be higher than large cap funds. So, in case you are an investor who wishes to experience the best of both worlds and earn reasonable returns with moderate risk, it is wise to split your investment between the large cap and exchange traded mutual funds. Happy investing!
Recommended Read: How to Choose the Right Hybrid Mutual Fund?
