Why are mutual fund managers focusing on large-cap stocks?

For an investor looking to invest in mutual funds, mutual funds managers can play an integral role. These managers earn by investing their client’s money efficiently. Large-cap stocks are the most common investments by mutual fund managers.

Mutual funds in India have become a superior choice for investors looking for long-term investments. Mutual funds allow investors to have a diverse portfolio of multiple stocks. While choosing between Mutual funds, an investor looks for portfolios with large-cap stocks, which ensures low-risk and good returns over time. Let us understand what large-cap stocks are and why mutual fund managers prefer them.

What are large-cap stocks?

The financial market consists of stocks belonging to thousands of companies. The company's success is an integral factor behind the profitability of the stock. As the company progresses, the stock becomes stable and the return for the investor's increases. Large-cap stocks belong to successful companies with a market capitalization of more than 10 billion dollars or Rs 20,000 crore. These stocks are stable as such successful companies are less likely to incur losses or go down in the financial market. They provide huge returns to the investor and can be sold at a premium price in the financial market. 

The large-cap stocks of the Indian financial market can be found in the Nifty 50 list. Some of the popular large-cap stocks in India are: 

1. Tata Steel - 5 year return: 47.8%
2. Larsen and Toubro - 5 year return: 67.6%
3. ICICI Bank - 5 year return: 221%
4. Tata Consultancy Services - 5 year return: 20%
5. Reliance Industries - 5 year return: 24%
6. HDFC Bank - 5 year return: 59%

Also read: Best large-cap funds to invest in 2022

What are the key features of large-cap stocks?

The financial investment aims to maximize profits and minimize the risks associated with the investment. Large-cap stocks fulfil this purpose of an investor by providing stability and good returns. The key features associated with large-cap stocks are:

1. Low risk: Large-cap stocks to companies that have established themselves in their sectors and are growing reasonably. Since the returns depend on the company's success, the risk of loss is minimized in the case of large-cap stocks.
    
2. Better Analytics: Every investment is based upon a strategy formulated by the investor. This strategy requires data which will allow the investor to make informed decisions regarding the investment. Large-cap stocks are associated with established companies, so the historical data is available for an investor to analyse and formulate the strategy.
    
3. Transparency: Since the companies have been present for a long time, the investors are aware of the company's decisions and future goals. 
    
4. High Liquidity: The large-cap stocks belonging to the company are stable and provide good returns, leading to high market demand. This demand results in high liquidity, so the stocks can be converted into cash whenever the investor wants.
    
5. Regular Income: Companies with large-cap stocks provide regular returns to investors in the form of dividends. This dividend can be a regular income for the investors, which they can use to invest in other financial instruments.

Also Read: How Large cap, Mid cap and Small cap funds are categorised?

Why do mutual fund managers choose large-cap stocks?

Mutual fund managers provide their clients with the best options to invest in the financial market. The number of clients employing them increases when they provide good returns to their existing clients. Therefore, fund managers often rely on large-cap stocks, which can provide low-risk and good returns to their clients. 

By providing their clients access to large-cap stocks, these managers reduce the chances of their guidance leading to losses. Large-cap stocks have a better performance as compared to other stocks, which makes them a favourable choice for investors.

The financial market can become a difficult place for an investor to survive if there is no experience and guidance. Mutual fund managers provide this experience and guidance to the investors for a small fee. They ensure that the investors make the right choice by investing in stocks providing low-risk and high returns. Thus, large-cap stocks provide an opportunity for the managers and their clients to be successful in the financial market.