According to a report by Nuvama Wealth, for the year ended August 17, the large-cap fund category has returned an average of 9.5%, compared to the Nifty’s returns of 7.92%.
Fund managers said the strong performance of large-cap funds is due to a combination of higher exposure to mid- and small-cap stocks and being underweight on the technology sector and overweight on pharma.
Nippon India Large Cap Fund led the pack with returns of 20.77% followed by HDFC Top 100 at 16.66% and Edelweiss Large Cap at 14.97%.
“Our large-cap fund is focused on generating alpha through high conviction investing across 3-4 sectors at any point in time, when valuations and business conditions are in favour,” said Sailesh Raj Bhan, chief investment officer, Nippon Mutual Fund. Bhan says over the last year, investments in industrials, which capture the manufacturing investment theme, consumer discretionary sector which includes hotels, retail, and financials were significant positive contributors to the fund’s performance.
Large-cap funds must invest at least 80% of their corpus in blue chip stocks ranked 1 to 100 by market capitalisation. Fund managers have the discretion to invest the rest of the 20% in smaller shares, which has helped these schemes bounce back.
“Our recent outperformance was led by selective midcap ideas in hotels, chemicals, capital goods, and an uptick in growth companies relative to value companies,” said Bharat Lahoti, fund manager, Edelweiss Mutual Fund, whose large-cap fund returned 14.97% in the past year.
While large-cap funds have outperformed over the last year, wealth managers believe it could be difficult to replicate this consistently due to regulatory investment restrictions.
“There is very low flexibility for large-cap funds which restricts their ability to generate alpha,” said Vineet Nanda, founder, Sift Capital, a wealth advisor. “We suggest investors take large-cap allocation through the flexicap, or focused funds category where fund managers have high flexibility.”
Over the past three years, the large-cap category returned 19.75% compared to the Nifty’s 19.86%. In the past five and 10 years, large-cap funds have returned 10.99% and 11.77%, respectively, compared to Nifty’s returns of 11.04% and 12.25% in the respective periods.
Wealth managers point out the high expense ratio in active funds is a deterrent for investors. Most regular plans charge 200 basis points as against 20-25 basis points of index fund or ETF based on the Nifty 50. The higher expense ratio will make it difficult for a large-cap fund to beat the benchmark over a longer period.
“The expense differential continues to be high. Once returns are normalised, it will be difficult to pay more and beat the benchmark,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors. He recommends large-cap exposure through index funds.
