There are plenty of options to choose from for the average investor. However, to determine where to invest your money, you may have to establish a sound financial plan. Having a financial plan will help you achieve your goal and not get distracted from the market noise.
Also, investors need to determine their risk profile. Some investors are conservative, while others are aggressive. SEBI has categorized mutual funds based on scheme characteristics or based on scheme asset allocation, etc. This helps investors get a clearer picture of the various schemes on offer. Among Equity Schemes, there are further classifications. In this article, we will learn about two equity schemes: Large-cap Mutual Funds & Index Funds, and how are they different.
What is the meaning of large-cap mutual funds?
Large-cap mutual funds are a type of equity mutual fund that predominantly invests in stocks of large cap companies i.e. companies fall in the bracket of 1st -100th in terms of full market capitalization and have a minimum investment of 80% allocation to large cap companies.
What is the meaning of index funds?
The Index Fund is a type of Equity fund where the fund manager and his team do not actively manage stocks. Instead, they need to replicate the index or benchmark. An index fund mirrors the proportion as its underlying index and hence may fluctuate depending on the performance of its underlying index.
Although both large-cap mutual funds and index funds are types of equity mutual funds, there are certain characteristics that distinguish the two. Let’s understand the difference between large-cap mutual funds vs. Index fund.
- Investing Style:
A large-cap mutual fund is actively managed by the fund manager in accordance with the scheme’s investment objective. However, index funds do not require the active involvement of the fund manager and are considered to be passively managed funds.
An index fund invests minimum 95% of total equity assets in its underlying index. For instance, suppose if you invest in an index fund that tracks NIFTY 50 as its underlying index, you will have to benchmark NIFTY 50 to track the performance of that index fund.
On the other hand, a large-cap mutual fund is an open ended scheme investing predominantly in large cap company stocks.
- Expense ratio:
A large-cap mutual fund has a higher expense ratio as it is actively managed. However, index funds have a relatively less expense ratio as they are passively managed.
The Large-cap mutual fund performance has the potential to generate alpha i.e. they may beat the benchmark. The index fund has to replicate the benchmark index and hence it’s difficult for them to generate the alpha.
Whether you should invest in an Index fund or a Large-cap mutual fund in 2021 may totally depend on your investment objective in the long run.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.