Index Funds vs. Large Cap Funds: Which is Better?

What would you choose if you ever had to decide between the mountains or the sea? Everyone has varied preferences based on their needs, and if you love both, the choice becomes even harder. Similarly, if you had to choose between index funds or large-cap funds, what would you choose? Despite personal preferences, needs, and strategies, picking one when both fall into your radar can be challenging. We will guide you on how to make this decision. Let’s start with the basics.

What are Large Cap Funds?

Large-cap funds are mutual funds whose underlying assets are large capitalization companies. Large capitalization companies mean companies with a market capitalization of more than 1000 crores. These are well-established companies that have already made their place in the market.

Unlike small-market capitalization and medium-capitalization companies, large-cap companies are known to be more trusted and reliable since their brands have already entered the growth phase. 

Want to have a look at a large-cap company’s mutual fund? You can navigate to Groww and find the Groww Large cap funds of your choice. They can give you a clear idea of what a large-cap fund is.

What are Index Funds?

Index funds are a kind of mutual fund formed to mirror the performance of a particular market index. They offer a passive investment strategy and hold all or most of the assets using similar methods of replicating/tracking the index. 

These funds are also known to be safe funds since they mirror an index (mostly a good one). 

Now, if you are wondering if both these funds are the same, with low risks and moderate returns, how do you choose one? For this, let us understand the difference between index funds and large-cap funds.

Large Cap Fund Vs Index Fund

What is the better choice for you? Let us understand what each has to offer:

Large Cap FundsIndex Funds
Large capitalization funds could be managed actively or passively.Index funds are known to be only passively managed funds (since they follow an index). 
Large-cap funds have a higher expense ratio since they are managed actively at times. Index funds have a lower expense ratio since they are only passively managed. 
There is lesser risk in large-cap funds when it is compared to small or mid-cap funds, but it still is associated with market risks and movements. In index funds, the lower risk is due to the broader diversification and predictable performance built into the Index. 
Large-cap funds have the potential to outperform the market, but there could also be chances of underperformance. Index funds have consistent performance that matches the Index. Also, with index funds, there is no chance of outperforming the market. 
When it comes to dividends, large-cap funds hold an underlying investment in dividend-paying companies, which can offer a steady source of income. Index funds get dividends from the Index’s constituents, but the dividend yield is based on the particular Index tracked. 

Benefits of Large Cap and Index Funds

Know the benefits you can experience through the points mentioned below:

  • Benefits of Investing in Large Cap Funds
    • Large-cap fund companies are already doing well in the market; they are well-established and financially robust. They provide more stability when compared to small or mid-cap companies. 
    • The companies invested in large-cap mutual funds are often leaders in their provided industry, giving you the chance of the least market movement effects. 
    • Large-cap funds usually invest across different sectors, which lowers the impact of poor performance in one particular industry. 
    • Investing in different large-cap funds or companies lowers the risks associated with investing in one company. 
    • Several large-cap companies can pay you consistent dividends, which offers you a steady source of income. 
    • Your large-cap fund dividends can be reinvested to receive compound growth. 
    • You can use the expertise and experience of professional fund managers who want your fund to perform exceptionally well. 
    • Large-cap stocks are typically liquid, which makes it easier to buy or sell your shares without impacting the stock’s price. 
    • Large-cap funds often serve as a stable core holding in a spread-out portfolio, offering a solid foundation for long-term growth. 
  • Benefits of Investing in Index Funds
    • Since there is passive management, index funds have a lower expense ratio. 
    • Lower fees mean there is more money that you can invest into the fund to obtain higher returns. 
    • Index funds aim to match the benchmark index’s performance, which offers consistent and predictable returns when related to the Index. 
    • Since there is no active management, there is no risk of underperformance with poor managerial choices. 
    • Index funds have a simple investment strategy of mirroring an index, which makes them easier for investors to understand. 
    • The holding period of an index fund is very clear and predictable as it replicates an index. 
    • Since there is less trading, an index fund is known to generate lower capital gains, which means you would also have to pay lower taxes. 
    • Index funds are accessible from far and wide, and you can buy them through several platforms, firms, and even retirement accounts. 

Conclusion

Have you decided yet? We are sure you have! It only takes this much to analyze what would be the best option for you in the long run of investing in mutual funds. Right? Our final note would be – enjoy your investment journey. While you are at it, you should also be aware of the risks that come with this investment option. 

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