Pros & Cons of Incorporating Large-Cap

Investments as Part of Your Investment

Plans

“Financial security and independence are like a three-legged stool resting on

savings, insurance and investment,” said Brian Tracey.

Indeed, it is this need to attain financial security that drives individuals to

invest in different avenues. And the first step towards attaining financial
stability via investments is to opt for investments offered by credible sources.
This sense of credibility is one of the main reasons why large-cap investments
are hugely popular in the modern context.

Large-cap investments seek to invest one’s corpus in securities and schemes

offered by already established companies with high market capitalization. As a
result, investors often perceive large-cap stocks and mutual funds as the go-to
avenues for ensuring sure-fire investment success. However, just like any other
investment sub-domain, large-caps also have their own sets of merits and
demerits. Here’s an analysis of the pros and cons of incorporating large cap
investments as part of one’s investment plans in India:

Pros of Investing in Large-Cap Securities

1. Increased stability: One of the most important advantages of large-cap

investment is that the companies are already established in their
respective industries. As a result, it is often a wiser investment decision
to buy securities from these large companies as opposed to budding
startups that are still trying to gain a firm foothold in the corporate
world.

2. More transparency in dealings: Established companies tend to have far

greater recognition in the public sphere. This also comes with
 tremendous responsibility to live up to the expectations of their clients
and retain their positions as leading companies in their respective
domains. This sense of responsibility tends to result in high levels of
transparency in the dealings taking place between the company and its
many shareholders and bondholders, as well as the brokerage firms and
online stock brokers in India who may act as intermediaries in the
process.

3. Efficient valuation process: This transparency discussed earlier can also

facilitate easier evaluation of the company’s securities and assets. This is
because large-cap companies tend to clearly document their previous
investment records and current shares outstanding. This helps investors
to carry out extensive risk analysis and predict stock trends based on
previous stock performances. It also helps companies to effectively
measure these factors with the help of popular metrics such as P/B ratio,
P/E ratio, PEG ratio etc.

4. Availability of dividends: Conservative investors often steer clear of

equities due to the uncertainty and risks involved in these investments.
However, large-cap stocks often provide a frequent inflow of returns in
the form of dividends to their investors. These payments can also help
investors stand in good stead when bonds underperform in the market.

Cons of Large-Cap Investments

1. Stagnant Returns: While growth and development of a company

(regardless of its size) is a continuous process, large-cap companies may
have already reached a higher extent of their maximum growth as
compared to small- and mid-cap companies. Hence, the returns of
securities offered by these companies tend to freeze after a point, which
can generate a sense of stagnation in the minds of their investors and
shareholders. Thus, while buying shares or investing in mutual funds
online, many investors prefer to opt for incipient startups as compared
 to larger entities.

2. Unsuitable for quick buy-and-sell trading strategies: Since the values of

stocks and securities offered by large companies are subject to much
lesser fluctuations compared to those by smaller firms, it is probably not
a good idea to invest in large-caps if the investor’s main aim is to trade
the asset and earn huge profits. Instead, large-cap securities are often
held by investors for longer periods of time and offer relatively steadier
returns with lower risks.

3. Lower level of ownership in the company: Whenever an investor buys a

common-stock from a private company, s/he owns shares or units of this
company and is entitled to some privileges owing to the same. However,
due to the size of the large-cap organizations, investors often hold much
smaller positions as shareholders of these companies in comparison with
those who own the shares of small- and mid-cap firms.

Conclusion

Investing in large-cap securities can be very rewarding to an investor

looking for financial stability and reasonably high returns. The key here is to
evaluate the pros and cons of such an investment and study the trends of
the company’s previous securities carefully in order to make an informed
investment decision. Coordinating with registered investment advisors and
seeking timely guidance can go a long way.