Are large-cap stocks safer?
When investors select their stocks, they must decide between risk and reward. Large-cap stocks usually belong to large, established companies and are safer investments than small- or mid-cap stocks.
Large-cap stocks are generally considered to be safer investments than their mid- and small-cap stock counterparts because they are larger, more established companies with a proven track record. Some of the biggest names in business are large-cap stocks – Apple, Microsoft and Alphabet, for example.
Large-cap funds are less risky than small and mid-cap funds. Small and mid-cap funds have higher growth potential than large-cap funds. Large-cap funds are good for conservative investors. Mid and small-cap funds are suitable for medium-risk takers to aggressive investors.
Small-cap stocks and large-cap stocks both come with their own pros and cons. While small-cap stocks can generate higher returns, they also have a higher risk profile. Conversely, large-cap stocks witness smaller growth but are more stable. Investors should consider investing in both for a balanced portfolio.
Large cap stocks are valued at greater than $10 billion in the market, making them more stable and mature investments. As a result, large cap stocks typically have lower volatility, greater analyst coverage, and perhaps a steady dividend stream.
Growth Potential: While large-cap stocks may offer stability and income, they may not have the same growth potential as smaller companies. Investors looking for high-growth opportunities may need to consider smaller-cap or mid-cap stocks that have greater potential for expansion but also come with higher risks.
Drawbacks: Slower growth: Large-cap stocks may not offer the same growth potential as smaller companies, limiting potential capital appreciation.
| Scheme Name | Plan | 2Y |
|---|---|---|
| PGIM India Large Cap Fund - Direct Plan - Growth | Direct Plan | 17.02% |
| JM Large Cap Fund - (Direct) - Growth | Direct Plan | 22.69% |
| HSBC Large Cap Fund - Direct Plan - Growth | Direct Plan | 18.29% |
| ITI Large Cap Fund - Direct Plan - Growth | Direct Plan | 21.30% |
But on average, investments in large-cap stocks may be considered more conservative than investments in small-cap or mid-cap stocks, potentially posing less overall volatility in exchange for less aggressive growth potential.
Large-cap stocks include many of the best-known companies in the world, and although they might not be as exciting as smaller companies with high growth potential, they are typically a safer investment.
Is large-cap high risk?
Large-cap stocks are a good option if you want to invest in a company's stocks by taking less risk. These stocks are less volatile than mid-cap and small-cap stocks, and lower volatility makes them less risky.
Some investors think earnings could drive the next leg higher for small-caps. Analysts expect earnings growth among companies in the Russell 2000 to rebound to 28.2% in 2024, after an expected decline of 11.2% for 2023, according to FTSE Russell.
Large-Cap Funds:
Large-Cap Funds are considered relatively more stable because the companies are typically reputable, trustworthy, and well established in the market. These are mostly market leaders and well-known brands with a good performance track record over the medium to the long-term investment horizon.
Balanced Investor: A balanced investor should consider having some exposure to small-cap stocks. The remaining 25–30% can be divided between midcaps and small-caps, with roughly 70–75% allocated to large caps.
Long-term growth: While offering lower potential returns than mid-cap and small-cap funds, large-cap funds can still provide consistent long-term growth over time. This is due to the established track record and stability of the companies they invest in."
- Adani Green Energy Ltd. Power Generation & Distribution.
- AU Small Finance Bank Ltd. Banks.
- Polycab India Ltd. Cables.
- KEI Industries Ltd. Cables.
- Avanti Feeds Ltd. FMCG.
- Bajaj Finance Ltd. Finance.
- Britannia Industries Ltd. FMCG.
- Adani Total Gas Ltd. Gas Distribution.
Large-cap companies are typically more stable, with established technologies, substantial cash reserves, and a proven track record. While small caps have the potential to outperform in a declining scenario, the higher risk associated with them should be carefully considered by investors.
Large Cap Funds are hence known to generate regular dividends and steady compounding of wealth. Also, these schemes carry a lower risk as compared to the small-cap or mid-cap schemes and are known to generate steadier returns.
Higher risk. 1. lliquidity risk — The shares of smaller companies are less liquid than shares of their larger peers. They also have higher insider ownership, leaving a smaller free-float for external shareholders.
The small firm effect theory posits that smaller firms with lower market capitalizations tend to outperform larger companies. The argument is that smaller firms typically are more nimble and able to grow much faster than larger companies.
Are large-cap stocks volatile?
In general, large-cap stocks tend to be less volatile than small-cap stocks. This is because small-cap stocks generally represent younger, less-established companies that do not have the financial resources of larger companies and are thus more vulnerable to a downturn in the economy.
Small-cap stocks have a long-term performance advantage over large-cap stocks, and this is often referred to as the small-cap effect. Small-cap stocks are said to be economically sensitive and therefore rally in recoveries and lag heading into recessions.
While the very largecap names seem to be more reasonably valued, as we go down the market cap quality and risk curve, the extent of overvaluation keeps on increasing and you cannot even understand what is happening in some of the midcap and smallcap stocks.”
Lower rates and better valuations
The consensus is that interest rates look to have peaked, with markets now pricing in cuts across many major economies in 2024, something which could prove beneficial to small caps.
Analysts forecast that 2024 earnings for small-cap companies will grow faster than large-cap earnings in most regions.
