Today after a couple of months break due to all the various reasons including the impact of nCoV, I am trying to be back to your queries. Lot of people reached out to me after reading reviews of various category of funds and pointed out that i didn’t review the Large & Mid-cap category. Let’s talk about Large & Mid-cap Funds and try to understand about what these funds offer and what to expect from them along with our screening of the fund category. let’s start with the disclosure that 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 & Mid-cap funds? What is their risk & return profile?
As per the latest SEBI guidelines, Equity & Equity related instruments with minimum investment in large cap companies 35% of total assets & in mid cap stocks 35% of total assets. An open ended equity scheme investing in both large cap and mid cap stocks. The CAGR return for the category has been in range of 6-14% over the last 3 and 5-15% over the last 5 years. This shows that there is a huge variance in performance across various funds so its important to pick the right fund as well.
If Nifty valuations stays high and earning growth does not return to double digits, the returns might stay in the similar ranges or lower range over next few years. (Read about how to project probable market returns: Three Drivers of Market). Also, These funds tend to be on par or slightly more volatile then pure large cap funds but superior in terms mean returns. Their volatility is quite similar to Multi cap funds so i personally find this category redundant because for similar volatility and better flexibility to Fund Manager, i expect Multi-caps to perform better or at par.
Who & when should we invest in these funds?
If you are new to equity investing and still have not figured out your asset allocation, risk appetite etc, it is throwing darts in the dark. Though the ask is that you should hold your investments for at least 5 years+, even though it does not guarantee the good returns but the chances of loss will be very small. If you have a long investment horizon (7 years+), and can stomach some short term volatility of returns then this category can also be part of your core portfolio (Read: Core & Satellite Portfolio).
Which are the best funds in this category?
Looking among the fund with at least 5 yrs of history and >1000cr of AUM. Here are my Top picks in order of preference
- Canara Robeco Emerging Equities Fund
- Mirae Asset Emerging Bluechip Fund
- SBI Large & Midcap Fund
Data is as of Feb 14th 2020, Source: Value Research & Morning Star
The top 5 highlighted are the winner based on expense ratios, lower turnover, higher returns, better upside capture vs downside capture & limited max draw-downs. It is a good screening exercise, if you have seen my other category reviews you might be familiar with the approach as well. Below chart shows you the range of historical returns for each of our top 5 picks, Returns are annualized geometric mean returns calculated on a rolling basis for a 5 year investments during last 10 years period vs their volatility. (Used Regular funds returns for longer historical data)
Canara Robeco Emerging Equities Fund has the lowest volatility and 2nd best returns among these top 5 funds. Mirae Asset Emerging Bluechip Fund is much more volatile in the group but the extra mean return vs other in the lot makes it another good pick (More risky though). SBI Large & Midcap Fund has the second lowest volatility, consistent performance along with lower Max draw downs in recent history is the last pick.
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 3 picked based on your preference. Though you should plan your exit form the bottom performers in a tax efficient manner.
Do write to us for your feedback, queries and suggestions. if you like it, don’t forget to subscribe it. Read more category reviews: Aggressive Hybrid Funds, Large-cap fund, Multi-cap fund, Small cap fund, Value funds.
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