About Large Cap Mutual Funds
Mutual funds are a common and useful investment type for many investors. By pooling money together with other investors, a person can get additional diversification of their funds. Additionally, since the pool is managed by a professional manager, it relieves the investor of the need to research and buy individual stocks. Mutual funds are often limited to a certain type of investments by their prospectus, one such limit is how large the companies need be to be invested in.
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Types
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Mutual funds are often categorized by several factors including the type of investments they hold. One such categorization is based on the size of their market capitalization. Generally, the categories are Large Cap, Mid Cap, Small Cap and Micro Cap. Occasionally some also include a Mega Cap category which would be reserved for the largest companies.
Significance
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Many financial experts and professionals recommend using asset allocation to manage a portfolio. Asset allocation requires the investor to make investments in certain classes of investments based upon their historical performance and volatility. Such an investor would need to make a certain investment in stocks of varying size including large companies. A large cap mutual fund would provide that investment.
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Features
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While there is no hard and fast definition of what a large cap stock is, respected mutual fund research firm Morningstar considers the companies which represent the largest 70 percent capitalization of investable stocks. As of January 31, 2009 that was stocks with a market capitalization of at least $4.3 billion. Barron's Dictionary of Finance and Investment Terms considers stocks with a minimum market capitalization of $5 billion to be large cap.
Benefits
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Larger companies tend to be less volatile than smaller companies which may be less like to whether events. Also, larger companies are more likely to pay a dividend. A large cap mutual fund allows an investor to take advantage of investing in such companies.
warning
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Just because a company is large does not mean it cannot encounter financial difficulty. Thus, it is important to understand more than just what size companies the mutual fund invests in. Large cap mutual funds can be aggressive, conservative, dividend focused, or growth focused. Be sure to read the fund's prospectus to fully understand the objectives and strategies employed by the fund.
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