EXPLAINED: Large-cap stocks are usually safe bets. Should you invest during a bear market?

For their transparency, stability, and clean financial legends, large-cap stocks continue to be important as investment instruments. When the market is going through a downtrend, they seem to offer a safety net, even if they stand corrected because of the overall market condition. Here’s why:

 
What are large-cap stocks?
  
Large-cap stocks are high-value stocks. They comprise well-established companies which have been around for years. A large-cap company in India is typically worth Rs 20,000 crore. Many large-cap stocks also fall in the blue-chip category  
 

How is market capitalisation calculated?

To calculate the market capitalisation of a company, one has to multiply a company’s outstanding shares by the price of one stock unit. Given the value arrived at, a company can then be labeled as large-cap; mid-cap, and small-cap. Stocks of companies like Reliance, TCS, HDFC, and Infosys are categorised as large-cap.
 

Are large-cap companies safe?

As large-cap companies usually have a strong market presence, investing in these companies is generally considered safe. Large-cap companies are used for long-term investments because of their stability and potential to earn dividends.  
 

Who prefer buying large-cap stocks? Are they risk-free?

Manoj Dalmia, Founder and Director, Proficient equities Private limited explains:  “Large-cap stocks can be bought by those who consider taking a lesser risk when compared to mid-cap or small-cap companies. Lot of large-caps have corrected in this recent selling spree and many are below their 200 D EMA indicating a downtrend, investors can accumulate known brands in their portfolio by buying at dips.” 

Why should you have large-cap stocks in your portfolio?

There are several reasons for picking large-cap companies. Primarily, these companies are transparent. Because of their corporate stock record, investors can easily access the financial legends of these companies. Because these companies are stable, they make for long-term investment horizons. Large-cap companies are usually well-managed by experienced industry veterans. Usually, chip and large-cap companies pay dividends consistently over a long period. 

Why do investors bank on large-cap stocks during a bear spell?

Because of their financial maturity, large-cap stocks may not give fast and high returns, but they are stable and considered low-risk when the market conditions are choppy. They also offer high liquidity because of their general popularity. In an unpredictable market situation with a bearish trend, investors prefer putting in money in large-cap stocks which may be expensive but have less chance of a wipeout.  

What are the closest options to large-cap stocks?  

Mid-cap stocks are the closest options to large-caps followed by Exchange Traded Funds (ETFs) and equity funds. Instruments like ETFs and equity funds operate to minimise risks.  

How much of your portfolio should now be dedicated to large-caps?

Ravi Singh, Vice President and head of Research, Share India said: “Large-caps are generally expensive to invest and mid-caps and small caps are more preferable among the investors. But now after the massive correction in the index, large caps have also corrected around 30 per cent which is an attractive level for value buying and can deliver substantial returns on market recovery. Investors must invest 60 per cent of their investment in large caps at current levels.”
 

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