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Is it time for you to play it safe and bet on large cap mutual funds?

Actively-managed large cap schemes had lost out to their passively-managed counterparts in the last two years because the market rally was confined to a few select index stocks.

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Last Updated: Apr 08, 2020, 09.19 AM IST
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Will large cap mutual funds reclaim their lost glory? Well, several mutual fund managers and advisors believe so. They have been recommending investing in large cap mutual fund schemes in these uncertain times, and they also believe that a likely broad-based rally (when it happens) will change the fortunes of actively-managed large cap schemes in the coming months. Actively-managed large cap schemes had lost out to their passively-managed counterparts in the last two years because the market rally was confined to a few select index stocks.

“Large caps have an edge above their small and mid cap peers at the moment. Some very good big businesses are available at a discount. That’s why large caps might be well placed to participate in a rally, says Rupesh Patel, Fund manager, Tata Mutual Fund.

Valuations and notions of flight to safety apart, the sustainability of business is also contributing to the interest in large cap stocks in the market. According to many investment experts, it would be very difficult for businesses to come out unscathed after the Covid-19 crisis. They believe that many mid- and small-sized companies might be hit very hard during the lockdown and subsequent slow march to normalcy. Very large companies might pull through the tough phase relatively better, they reckon.

Inflows into large cap schemes and the relief rally in the large cap segment may offer some clues.

The inflows into large cap schemes have increased in the last one month by Rs 450 crore. In January, 2020, the large cap schemes saw an inflow of Rs 1,154 crore, compared to Rs 1,606 crore in February. Rupesh Patel believes that largecaps are seeing inflows because of the flight to safety but the inflows are not that high according to him.

“At this point, there are no extra-ordinary inflows into largecaps. I think many investors are not moving their money. These are bleak times and inflows might be hit because everyone wants liquidity in such times. If the money comes in, this is a great time to allocate to good companies available at attractive rates,” says Rupesh Patel.

“We will have to see whether we will get large inflows into large cap schemes because corporate FIIs, FPIs, HNIs, everyone will be focusing on maintaining balance sheets and trying to handle other issues in a lockdown,” says Jimmy Patel, MD & CEO, Quantum Mutual Fund.

After hitting a low of 25,981 on March 23, the S&P BSE Sensex has inched up to 28,845 as on today, up by around 11% in a fortnight. S&P mid cap and small cap indices moved up by around 8% during the same period.

However, this is not to say that the large cap schemes marching towards the victory stand already. The road to recovery is very long and we may see many hurdles along the path, accroding to mutual fund advisors.

However, will actively-manages schemes beat their passive cousins this time around? Rupesh Patel thinks so.

""In the last two years, we have seen a narrow rally where a couple of big large cap stocks moved the market and continued the rally. That’s why index funds had an edge above the actively-managed large cap schemes,” says Rupesh Patel. “The valuations at the moment are very attractive and thus there are expectations of a broad-based rally. In this scenario, active schemes have a chance to beat the benchmark. This is a time when a fund manager wants money to deploy in the market,” adds Patel.

However, some experts like Jimmy Patel nurses some doubts about this theory. “If there is a narrow rally again, the whole purpose of all this correction will be lost. In the last one year nothing in the rally was driven by fundamentals but by emotions and sentiment. If the rally is driven by sentiments again and not based on fundamentals, then we might see passive funds leading the charts and diversification losing purpose,” says Jimmy Patel.

However, Patel believes that passive funds are yet to prove their worth in the long run, but their cost efficiency has made them attractive. "At this point actively managed funds might have an issue generating alpha but because of diversification, they might be able to manage their downside better,” says Jimmy Patel.

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