Equities can be a great asset class to invest in and build wealth over the long term. However, when you are investing in the stock market, it is important to understand the different segments of the stock market i.e., large caps, midcaps and small caps.
Large cap investing involves investing in large market cap companies i.e. top 100 companies in the listed space. These companies typically tend to be industry leaders. The Nifty 50 or the S&P BSE Sensex represents the top 50 and 30 companies respectively and is widely regarded as the barometer of the country’s stock market.
There are many benefits of investing in large cap stocks. To begin with, large cap stocks are well-established businesses that are comparatively less volatile than smaller companies. Second, large cap stocks tend to have more predictable revenue streams and profits. They also offer steady dividends to their investors. Third, under trying circumstances, these companies have the resources to weather economic downturns and have a better probability of sustaining growth over the long term.
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Because of these reasons, large cap investing can be an attractive investment option for risk-averse investors who want to invest in the equity markets without taking aggressive risks.
Valuation of Large Cap Stocks
One of the ways to look at valuation would be to check out the large cap index’s PE ratio.
The P/E Ratio helps to gauge if a stock or index is over or undervalued. Stocks and indexes with lower PE ratios suggest better value as their stock prices are much lower than their earnings, opening up room for further upside. As of 31st March, 2024, the PE ratio of Nifty 50 was at 22.88x compared to Nifty Smallcap 250 and Nifty Midcap 150 at 26.60x and 33.63x respectively. Currently, on a valuation basis, large cap stocks seem to be better placed than mid and small cap names. As a result, large caps are offering better margin of safety from an investment perspective.
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Why Invest in Large Cap Funds in 2024?
One of the easiest ways to invest in large cap stocks is to invest in large cap funds that have to invest 80% of their portfolio in large cap stocks. The year ahead is likely to be a volatile because of general elections and global events. In such a scenario, the presence of a large-cap fund in a portfolio can offer some stability. These established companies tend to be less susceptible to market swings and policy changes, making them a good option for equity investors.
These funds are managed by expert fund managers who actively monitor the market and make investment decisions based on the current and future growth trajectory of individual stocks among other aspects. By investing in a large cap fund, you can leave the stock-picking to the fund manager who will do the needful be it in terms of detailed research and analysis before investing in stocks or balancing periodically, both of which are challenging propositions for a retail or lay investor.
Today, investors have a variety of large cap funds to choose from. When making the selection, do ensure to check the long term track record of the fund. Also, check how the fund has performed in varying market conditions. This will give a fair idea on how the fund manager has been successful in navigating the portfolio through various market conditions.
To conclude, when taking into account the valuation and the other factors mentioned above, it is clear that investing in large caps is the prudent choice in the current market condition. In case if you are unsure how to go about with the fund selection, do seek the expertise of a professional financial advisor who will help you with your investments after taking into account your financial goals, risk tolerance, and investment horizon.
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Disclaimer
The views are personal and are not part of the Outlook Money editorial Feature.