Mutual Fund

Category Review: Large & Mid cap Funds

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

  1. Canara Robeco Emerging Equities Fund
  2. Mirae Asset Emerging Bluechip Fund
  3. SBI Large & Midcap Fund

Data is as of Feb 14th 2020, Source: Value Research & Morning Star

Fund Performance L&M

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)

Risk vs Return

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 fundMulti-cap fundSmall cap fundValue funds.

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Mutual Fund

Category Review: Small Cap Funds

“Good things come in small packages” A proverb people love to apply in the investing domain quite often to justify their exposure to funds investing in small cap category. In last few weeks, I saw the portfolio of lot of people & found it disturbing that they have the large exposures to small or small & mid cap funds. Often you will find, people advising that small cap funds are more risky but this advise always fall on the deaf ears. As a result when the tide turns, people start running for shelter. Today we will try to understand that are small cap funds risky, should we own them if yes, how much exposure and which funds.

Myth : High risk means high returns

Most of the people correlate the relation of high risk to high return. They also went on to justify that their higher risk appetite and longer investment horizon allows them to take higher exposure to small cap funds. In 2017 small cap fund category delivered 46% returns, lot of newbies quickly turned their attention to this category and looked for 5 year returns. Fortunately there was no instance of -ve returns in 2013-2017 and CAGR of the fund category was 24%. This is awesome, no? This is a bias people have, come what may, most of us look at the recent data (specially returns) and place lot of importance on that vs Overall history. if you look in the below table you will realize that over a longer time horizon 2008-YTD the CAGR returns of this fund category has been mere 8.8%.

Small Cap Fund Category Return 2008-2019YTD.png

This might come as a surprise to many as 1. No one bothered to look for long term history/ 2. People think that this time it is different and Small caps will keep outperforming/ 3. They believe that they have skills to buy and sell at right time to avoid the years like 2008 or 2011 but fail to do so in 2018 even when there were signs of over valuations in that market segment.

Am i suggesting that we should not buy the small cap funds?

No, I am saying when you think that your risk appetite as well as risk capacity is higher than do not jump into small cap funds but increase your exposure to equity. In any portfolio, your aim should be to to keep the right amount of equity exposure. The Core Portfolio should always have a balance of debt and Large cap funds (Active or Index) then you can have satellite portfolio of small exposure (5%-15%) to Small cap funds or Sector/ thematic funds. You can read in detail at Core & Satellite investing.

Which small cap fund should you invest in?

I generally follow the below metric to select a fund, you can refer to the same. The fund has to have lower expense, better Alpha and Sharp ratios, Most importantly it’s max draw down should be limited. Based on these parameters, SBI Small Cap or HDFC Small Cap fund will be my preference but any Top 5 funds are good enough to be in your portfolio.

Small Cap Fund Reviews & Rankings.png

Lastly make sure, you review the fund performance every year and continue to watch them, exit if it goes outside top 5 and stays there for 6-12 months.

Happy Investing!