“Size Matters.. so keep your dreams big and worries small” – Gail Lynne Goodwin
Large Cap funds which have investments in large/ giant companies in Nifty and given better liquidity in that category have a lower volatility. On the request of investors, here is the category review & recommendations for large-cap funds . Though before we go in details, let’s make sure the below funds are not a recommendations but the broad comparison of the funds in same category to help us shortlist the consistent funds. Selection of a fund in your portfolio is dependent on lot of other factors including your asset allocation, time horizon and risk profile.
What are large-cap funds? What is their risk & return profile?
As per the latest SEBI guidelines, Large-cap funds should have a minimum investment in equity & equity related instruments of large cap companies 80% of total assets. It is an open ended equity scheme investing across Top 100 by Market Cap. So in theory, the fund manager has the limited sets of stocks to pick most of these stocks are very well researched and followed by investing community in India as well as among FPIs/ FIIs. The opportunity to generate alpha against index is a challenging job and as we progress and as market participation increases it will fade away.
The CAGR return for the category has been in range of 8-10% over the last 3 as well as 5 years, if the PE valuations stays high and earning growth does not return this will stay in the similar ranges (Read: Lessons from Nifty History). Though the volatility in these funds is relatively lower vs other fund categories like Mid/ small cap funds and similar to lower vs mutli cap funds. Please note that the lower volatility does not mean that they don’t give negative returns
Who & when should we invest in these funds?
As I mostly say, This is much complex question to answer as it needs more careful evaluation for specific individual. Though the broad parameters which will continue to be applied in here are the market valuation levels, risk tolerance/ capacity and investment horizons. If you have a medium-long time horizon (5 years+), and need to invest a part of your portfolio in equities this is one of the category to look for. Though important point to note is that if you want to stay invested for really long terms like 10-15 years or more then you want to split your investments between a large cap fund and ETF/ Index fund. As mentioned earlier, Over longer horizons generating alpha in this category will be a real tough job so you want to minimize on the expense ratio you pay for the fund. This fund category is kind of must to have in your core portfolio. (Core & Satellite Portfolio)
Which are the best funds in this category?
This is a highly crowded category of funds, where you have Actively managed funds, Index funds, focused funds as well as ETFs. Below is where we analyze the active large cap funds only. Here are my picks,
- Axis Bluechip fund
- Reliance Large Cap
- ICICI Prudential Bluechip
- Invesco India Large Cap
- Canara Robeco Bluechip
I have purposefully removed the Mirae Asset large cap fund in the list even if it comes at the top because it joined the Large cap mandate recently and brings in the historical performance of mutli-cap fund.
Data is as of Aug 16th, Source: Value Research & Morning Star.
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Based on suggestion from a friend last time, I have added the parameters over the 3 yr horizon as well to make sure it is consistent. That was a helpful suggestion as you will notice that SBI Bluechip fund has been great on a 5yr horizon but struggled in last 3 years. Those of you who hold the funds other than suggested, if your fund is in the top 5-10 of the category you can continue to hold it or think of opting from one of the Top 5 based on your preference.