When it comes to equity investing, stability definitely matters. This is especially true for the risk-averse investors who are looking for steady growth rate without taking too much risk on their shoulders. That is where the importance of large cap stocks in designing a well-balanced portfolio comes into the picture.
Mid-cap and small-cap stocks have very high growth potential over a longer term but that normally comes with high risk. On the other hand, large-cap stocks offer steady and stable returns with low risk.
Before getting into the benefits of owning large-cap stocks, let’s first understand various types of stocks as per the market capitalization. Market capitalization refers to the total market value of a listed company’s outstanding shares.
What is a large-cap stock?
Large-cap stocks are the stocks of well-established companies that have a strong market presence and high market capitalization. It is easier to track the performance of large-cap stocks as they regularly disclose information through various media platforms. As per the recent SEBI guidelines, the top 100 stocks as per the market cap fall under large cap stocks.
What are mid-cap stocks?
Mid-cap stocks are stocks of smaller than large-cap companies in terms of revenue, profitability and market capitalization. These have high growth potential over a 3 to 5 year time period, albeit come with a comparatively high risk when compared to large cap stocks in India. SEBI defines 101st to 250th companies as per market cap fall as mid-cap stocks.
What are small-cap stocks?
Small-cap stocks are stocks of startup firms or companies which are in developing stage with low revenues and small market capitalization. According to SEBI, 251st onward companies as per market cap fall under the category of small-cap stocks. In comparison with large-cap stocks, small-cap stocks are considered highly risky in nature. Information available on small-cap stocks is very limited making it very difficult to analyze their future growth potential.
Among all three categories of stocks discussed above, investment in large-cap stocks in India is less risky compared to mid-cap and small-cap stocks in India.
Due to the humongous size of the business and high stock price, many investors feel that investing in large-cap stocks won’t help them to generate mind boggling returns over a period of time.
One look at the below table can you give you a brief idea about the outstanding returns generated by large-cap stocks in India.
Now let’s take a look at 5 benefits of owning large cap stocks in India.
Stability to portfolio:
Large-cap stocks in India are majorly known for their stability because large-cap stocks are less likely to get less affected by any uncertainties in the economy as compared to small-cap stocks in India. This is because they are well-established businesses with a steady consumer base and hence they are less impacted during uncertain times as compared to small-cap stocks in India. This builds a sense of trust and value buying among risk-averse investors.
Large-cap stocks in India are famous for offering steady dividends. This offers a steady source of income to investors and can compensate for the slower rate of growth in the stock price of large-cap stocks as compared to mid-cap and small-cap stocks in India.
Well managed business:
It takes great managerial and entrepreneurial skills to maintain sustainable growth. Any large-cap stock in India that has consistently outperformed is likely to follow the trend in future as well, assuming the fundamentals doesn’t deteriorate dramatically.
Clarity in valuation:
Due to the stringent public disclosure regulation, investors of large-cap stocks in India have easy access to the company’s information, making it easier to track its future performance and forecast growth earnings. These are crucial factors in understanding the risk and reward of investing in large-cap stocks in India.
The Bottom Line
To conclude large-cap stocks in India are good for those investors who want to create wealth with low-risk exposure. On the other hand, small-cap stocks in India have more room to grow in spite of the associated risks.
As the English proverb says, “Don’t put all your eggs in one basket.” It is always advisable to diversify your portfolio with a mix of large cap stocks in India, along with mid-cap and small-cap stocks.