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Large cap index mutual funds continue to outshine actively-managed large cap schemes

In fact, the top 13 positions are taken by these mutual fund schemes following the passive investment strategy.

, ET Online|
May 07, 2019, 02.54 PM IST
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Large cap index funds are outperforming the actively-managed large cap mutual fund schemes in the past one-year period. Kotak NV 20 ETF is topping the space with 20.42 per cent returns, followed by Reliance ETF NV20 (20.32%) and ICICI Prudential NV20 ETF.

In fact, the top 13 positions are taken by these mutual fund schemes following the passive investment strategy. HDFC Top 100 Fund, an actively-managed scheme, ranks 14th with 11.62 per cent returns in the same period. According to Value Research, a mutual fund tracking firm, there are around 91 open-ended funds in the large cap category.

Mutual fund advisors say the trend is mainly because of the current rally that is confined to a few large cap stocks TCS, Relaince Industries, among others. Since the benchmark index has a concentration of these large cap stocks, the index funds benefited more from the rally. Only a few actively-managed large cap schemes had large exposure to these scrips – that explains the lacklusture performance of the actively-managed large cap mutual funds.

“In the past few months, markets have moved up due to a few large cap stocks like TCS, Reliance Industries, ICICI Bank and Axis Bank. Our benchmark index has been concentrated only on a few big large stocks including these names. Index funds is made up of the same scrips as that of the index. And thus, index funds gained due to the presence of these stocks in their portfolio,” says Dinesh Rohira, founder and CEO, . “The current rally was narrow based. Most large cap stocks, mid caps and small caps did not participate in the rally,” he adds.

Several mutual fund advisors believe that actively-managed large cap funds are likely to stage a comeback once there is a broad-based rally in the market. “Once the scenario evens out post-election, we can see a broad-based rally with wider participation of sectors and market caps, including mid and small caps as well, unlike a narrow rally now. That rally can be either upwards or downwards, but being broad based, it won’t give extra benefit to the index funds,” says Rohira.

Prashant Maurya, partner, Citrine Financial Advisors , believes that actively-managed large cap funds would also have an edge over index funds because of the participation of mid and small cap stocks in a broad-based rally. “There is a lot of potential in our capital markets. Large cap funds can invest 20 per cent of their corpus outside large cap stocks at the discretion of the fund manager. And, whenever we see an upward rally in mid and small cap funds, those large cap schemes which have some allocation to the smaller companies will benefit and can outperform the passive funds,” says Prashant Maurya. As per Sebi norms, large cap mutual funds are mandated to invest at least 80 per cent of their assets in large cap stocks.

Mutual fund advisors say investors should not get swayed by the this short term trend and consider shifting their investments to passive large cap index schemes. “One year is too short a period to decide and make a move to the index funds. It is a tactical move which has taken place in the markets in the past six months. You should wait for one broad-based rally and check the performance,” says Rohira.

However, advisors concede that actively-managed large cap schemes are unlikely to beat the index by a wide margin. They say large cap funds are the most researched stocks. There is no scope to generate alpha unless the fund managers time their entry and exit right. “These are the biggest companies. Discovery of stocks cannot happen in the large caps. Only entry and exit timing will generate returns,” says Maurya. “Those investing in large cap funds should understand that the returns will remain benchmark-hugging and can expect them to generate returns equal to a figure of around inflation plus GDP,” he adds.

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