Large Cap Funds Value Strategy | Mutual Funds, Index Funds and ETFs

Large cap funds are mutual funds that are comprised of the biggest companies traded on the stock exchanges. These funds are a relatively low risk way of investing in the stock market.

These large cap funds may follow an index of large companies like the Dow Jones or the S&P 500 Composite Index. Or it many be hand picked in an actively managed fund by a professional money manager.

There are a variety of ways to invest in large cap funds. You can do it through traditional mutual funds. You can also invest via index funds or ETFs, exchange traded funds, which has increasingly become a popular investing option.  This is some investment advice about market caps and using them in your overall strategy.

Large cap refers to the market capitalization of a publicly traded company. The market cap is calculated by multiplying the stock price with the outstanding shares and is typically used to refer to how big the company is.

If a company has 1,000 shares outstanding and they are trading at $5 per share, the market cap would be $5,000 (1000 X $5). We are in essence saying that the company is worth $5,000 according to the market value.

Large cap stocks are companies with a market cap of over $10 billion. Mid cap stocks are between $2 and $10 billion and small caps are companies with a market cap of less than $2 billion. These are the general criteria, but is subject to change and may be different depending on who's talking.

A common misconception is that the share price is the measure of how big a company is, but that is not the case. For example, General Electric (GE) is currently trading at $18.05 per share with a market cap of $192 billion, making it a large cap stock.

By comparison, Red Hat, Inc (RHT) is currently trading at $30.76 but has a market cap of only $5.8 billion, making it a mid cap stock. Although Red Hat is trading at almost twice the share price, the market cap is considerably lower. What makes the difference is that GE has 10 billion outstanding shares, and Red Hat only has 188 million.

Risk and Volatility

The great advantage to large cap funds is that they have relatively low risk and low volatility. Because these are all very large companies, they are hard to sink.

In addition, these companies have proven themselves as reliable companies over the years and there is a reasonable enough historical track record to trust that they will continue to stay strong in years to come.

The downside to the low risk and low volatility is that the returns reflect it. Although it's relatively more difficult to lose a lot of money on large cap funds, it is also difficult to make an extraordinary amount of return as well.

These are investments that are meant to be buy and hold instruments that you keep for the long haul. It beats putting it into a savings account and may resemble investing in bonds more than what you might typically think of equity investing.

Value vs Growth Funds

There are generally three types of large cap funds you can invest in. They can be value, growth or blend funds. And these are three different strategies of picking stocks for particular funds.

Large cap growth funds seek out companies that have the potential and management strategy for growth. These funds are primarily seeking a return through capital appreciation.

Value funds look for large cap companies that have solid fundamentals, potential for long term growth and success, but is being undervalued by the market. Warren Buffett is probably the most famous large cap value investor in the world.

Market Timing Strategy

Large caps are where investors tend to turn to during an economic recession as a safer harbor to hold their money. These monster companies become one of the cash-hiding mattresses of the world's money.

When an economic downturn begins, investors usually take their money out of riskier investments like small cap stocks and emerging markets. Then they turn around and hide it in the US dollar, bonds, Treasuries and large cap stocks.

There are many ways to invest in large cap funds. You can do it through a traditional actively managed mutual fund. This usually involves quite a bit in management fees and most fund managers don't beat the market.

A couple of recent trends have been putting money into an index fund or an ETF, and with good reason. Let me briefly explain both avenues.

Large Cap Index Funds

An index fund is a passively managed mutual fund that follows one of the many large cap indices out there, like the Dow Jones or the S&P 500. These are passively managed, which means it's usually one guy or sometimes just a computer that is picking the stocks according to whatever index they are following.

This also means that the expense ratio, the measure of how much it costs to operate a fund, is much lower. And that translates into lower management fees for you the investor.

An added component to the index fund strategy is that you are not trying to beat the market, you are trying to grow with it. Historically, that has proven to be consistently a winning bet over time, something that many fund managers wish they could say.

ETF - Exchange Traded Funds

This is also a cheap way to invest in large cap funds. ETF's are funds that are listed on one of the 3 major stock exchanges and they trade just like every other stock on the market.

The price of the exchange traded fund is usually the net asset value of all the companies that are in that basket of stocks. And when you buy and sell shares of these ETF's, all you pay is your usual broker commissions.

One great advantage to buying ETF's is that unlike mutual funds, you can buy and sell them throughout the trading day. With mutual funds, you can only buy into them once a day at the end of the day, which can cause you to miss a lot of major market movements that occur throughout the day.

You can combine some of these options to invest in large cap funds, which many do. You could invest in an ETF that follows a large cap index. Then you would have the benefits of both index funds and ETF's combined.