The Advantages & Disadvantages of Large Company Stock Funds

The Advantages & Disadvantages of Large Company Stock Funds
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An investor who chooses to buy large company stocks is making a relatively safe investment choice by buying into industry leaders. An easy way to do this, without having to buy a lot of different securities, is to invest in mutual funds that hold shares of large cap companies. Growth in these companies can be slow because they have already attained a great size, but historically large cap stocks can be steady and dependable performers.


The Russell 1000 Index, which invests in large-cap stocks, indicates the median market cap for companies in that index is currently $5.5 billion. Market capitalization is determined by multiplying the current price a stock by the number of outstanding shares. Large-cap funds can be devoted to a particular industry, such as technology or energy, focused on a given region, or may be more diverse in nature. Risk may be moderate as these companies typically have an earnings history, but large cap stocks are not immune to failure.


In 2011, small cap stocks appeared to be trading near record-high levels, which suggests that investors pay a high premium to enter these funds. Large-cap funds, however, can appear to be undervalued based on technical analysis. Subsequently, investors can take advantage by investing in large company stock funds relatively cheaply.


Investors seeking high returns are not likely to find these types of profits in large company stock funds. Despite strong cash flows and solid income that many large companies produce, performance traditionally lags that of smaller capitalization. In the 10-year period leading up to 2011, small-cap mutual funds mostly produced higher returns than big company stock funds. However, higher returns generally come with higher risk.


Large-cap companies that pay investors dividends may continue to make those distributions uninterrupted for decades. This is an advantage for investors who are seeking steady and reliable income, even when investment performance lags. However, investors who focus solely on U.S. dividend funds might be shortchanged without looking overseas. In the early part of 2011, international large-cap dividend-paying mutual funds delivered better-than-average dividend yields and outpaced domestic large-cap funds.