Equity markets have been volatile lately due to a host of domestic and international macro and micro economic factors. But if you notice the graph given below, smallcap index has had a drastic fall but Largecap index and midcap index have managed to sustain the headwinds.

Besides, the recent corporate tax rate cut did boost the earnings of certain index heavyweights which improved the market sentiment leading to revival of indices.

Graph 1: Large caps hold strength while mid and small caps are down

Data as of November 19, 2019
(Source: ACE, MF)

Looking at the current market sentiment, several fund houses are of the view that when large-cap space and midcap space are combined, one gets an opportunity to invest in stability of large-caps and high growth potential of midcaps. Hence even Union Mutual Fund launched Union Large & Midcap Fund.

When combining the stocks of a large-cap and mid-cap segment, it covers 87% of the market capitalisation to a universe of 250 companies ranging from Rs 8,858 crore to Rs 8,12,262 crore.

The fund house is of the view Large caps consists of blue-chip companies, usually, market leaders that have established track record and they keep getting get better and bigger with less volatility involved. Whereas midcap companies appreciate into large-cap stocks over long term and that both of them are at reasonable valuations. The current price to value trade-off last seen was 4 years ago, based on the research done by the Union Mutual Fund.  

The stock prices track fair value, that tracks GDP and India’s GDP is poised to grow at a faster rate as the Government has introduced a slew of measures to increase the growth potential of markets.  Hence a large and midcap fund can provide better risk-adjusted returns was launched.

So, ULMF will follow the asset allocation limits to allocate its assets between 35% to 65% investment in equity & equity related instruments of large-cap and mid-cap companies each. The fund may also allocate utmost 30% of its assets to equities and equity-related securities of other than large-cap and mid-cap companies with the remaining allocation to debt instruments and money market instruments.

Thus, when you plan for long-term goals, want the stability of large-caps along with the agility of mid-caps in the journey of wealth creation and accomplishing financial goals and if you have the stomach for moderately high risk, you may skew your equity portfolio to a Large & Mid-cap fund.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

Image 1: Risk-return trade-off of large-cap & midcap fund

(Source: Union Large & Midcap Fund Product Brochure-Presentation)

Table 1:  Details of Union Large & Midcap Fund

Type An open-ended equity scheme investing in both large-cap and mid-cap stocks Category Large and Midcap Fund
Investment Objective To seek to generate capital appreciation by investing predominantly in a portfolio of equity and equity-linked securities of large-cap and mid-cap companies.

However, there can be no assurance that the investment objective of the scheme will be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans  • Regular
• Direct
  • Growth*
  • Dividend
    • Pay-out facility
    • Reinvestment facility*
    • Sweep facility
*Default option
Entry Load Nil Exit Load 1% if units are redeemed or switched out on or before completion of 1 year from the date of allotment. Nil thereafter
Fund Manager Mr Vinay Paharia Benchmark Index S&P BSE 250 LargeMidCap Index$ (TRI)
Issue Opens November 15, 2019 Issue Closes: November 29, 2019

$Disclaimer: The “Index” viz. “S&P BSE 250 LargeMidCap Index”, is a product of Asia Index Private Limited (AIPL), which is a joint venture of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and BSE, and has been licensed for use by Union Asset Management Company Private Limited. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); BSE® is a registered trademark of BSE Limited (“BSE”); and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). © Asia Index Private Limited 2014. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission of AIPL. For more information on any of AIPL’s indices please visit http://www.asiaindex.com/. None of AIPL, BSE, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of AIPL, BSE, S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC or their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, it is anticipated that the asset allocation of ULMF will be as follows:

Table 2:  ULMF ‘s Asset Allocation

Instruments Indicative Allocation (% of Total Assets) Risk Profile
Minimum Maximum
Equity & Equity related instruments of Large Cap companies# 35 65 High
Equity & Equity related instruments of Mid Cap companies# 35 65 High
Equity & Equity related instruments of other than Large & Mid Cap companies# 0 30 High
Debt and Money Market Instruments 0 30 Low to Medium
Units issued by REITs and InvITs 0 10 Medium to High

# In accordance with SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017, as amended from time to time, Large Cap, Mid Cap and Small Cap are defined as follows:

  • Large Cap: 1 st -100th company in terms of full market capitalization
  • Mid Cap: 101st – 250th company in terms of full market capitalization
  • Small-Cap: 251st company onwards in terms of full market capitalization.

(Source: Scheme Information Document)

What will be the Investment Strategy?

The Union Large & Midcap Fund seeks to generate long term capital appreciation by investing predominantly in a portfolio of equity and equity-linked securities of large-cap and mid-cap companies. To manage the assets of the Scheme, the investment team will follow an active strategy which would be a combination of a top-down and bottom-up approach.

The top-down approach shall involve analysis of the macro-economic factors, industry evaluation, benchmark industry allocation, market outlook etc. and shall be used to determine the asset allocation including cash levels and/or the target sector allocation.

The investment team shall also scan the market for opportunities and shall evaluate the individual opportunities on their merits, leading to the bottom-up investment decision.

The fund manager could use derivatives within the permissible limits for hedging and rebalancing the portfolio or such other purpose as may be permitted under the Regulations from time to time.

Investment in Debt and Money Market Instruments will be as per asset allocation pattern mentioned in this document, subject to the investment limits prescribed under the SEBI (Mutual Funds) Regulations, 1996 and circulars issued thereunder. Investment in debt securities will be guided by credit quality, liquidity, interest rates and their outlook.

The Scheme may also invest in the units of REITs and InvITs for diversification, subject to conditions prescribed by SEBI from time to time.

Who will manage the Union Large & Midcap Fund?

Mr Vinay Paharia is a commerce graduate and has done masters in management studies (MMS). He is currently the Chief Investment Officer at the AMC and has over 15 years of work experience in Equity Research and Fund Management.

Before joining Union Mutual Fund, Mr Vinay Paharia was working with Invesco Asset Management (India) Private Ltd. as the Equity Fund Manager for more than a year.  Prior to it, he was associated with DBS Cholamandalam AMC, K R Choksey Shares and Securities Pvt Ltd and First Global Stockbroking Pvt Ltd as Equity Research Analyst.

Some of the schemes, that Mr Vinay Paharia manages at the fund house are; Union Multi-Cap Fund (Formerly Union Equity Fund), Union Value Discovery Fund, Union Focused Fund, Union Small Cap Fund, Union Equity Savings Fund, Union Balanced Advantage Fund, Union Largecap Fund, Union Long Term Equity Fund (Formerly Union Tax saver scheme),  Union Capital Protection Oriented Fund – Series 7 and Union Capital Protection Oriented Fund – Series 8.

Table 3: Performance table of the schemes managed by Mr Vinay Paharia

Scheme Name Benchmark Name Managed Since Scheme Returns (%) Benchmark Returns (%)
Union Balanced Advantage Fund S&P BSE Sensex 50 June 2018 – October 2019 9.07 7.97
Union CPO-7 March 2018 – October 2019 6.89 10.61
Union CPO-8 CRISIL Hybrid 85+15 – Conservative Index 7.17 9.26
Union Long Term Equity Fund S&P BSE 500 – TRI 7.37 6.90
Union Value Discovery Fund December 2018 – October 2019 4.18 7.00
Union Focused Fund August 2019 – October 2019 7.84 8.22
Union Multi Cap Fund March 2018 – October 2019 8.16 6.90
Union Small Cap Fund Nifty Smallcap 100 – TRI -7.65 -15.95
Union Largecap Fund S&P BSE 100 – TRI June 2019 – October 2019 10.80 8.74
Union Equity Savings Fund CRISIL Short Term Debt Hybrid 75+25 Fund Index August 2018 – October 2019 7.95 7.78

(Source: ACE MF, PersonalFN Research)
(Data as of November 19, 2019)

As can be seen from the performance table, most of the schemes managed by the fund manager, he has been managing since March 2018 and they have to still catch up with the peers within the category. Hence the management style does not give much confidence to investors.

The outlook for Union Large & Midcap Fund:

In order to achieve the investment objective, the fund manager of the Union Large & Midcap Fund will invest predominantly in stocks of companies that are a part of the large-cap and mid-cap segment of the market capital, using a combination of bottom-up and top-down approach through active management.

And to select stocks from the universe (current fund house universe of about 157 stocks) of more than a defined threshold, a two-step process will be followed. The first step includes a BMV (Business, Management and Valuation) filtering process to select stocks of companies that have reasonable and sustainable growth.

 Image 2: Business Management Valuation(BMV) filter

(Source: Union Large & Midcap Fund Product Brochure-Presentation)

The second step includes stock segmentation process, wherein they are segregated into growth stocks and bargain stocks. It is followed by a focused approach to create a portfolio with an objective to have a high potential return portfolio that will invest in large-cap and mid-cap stocks and allocate assets accordingly.

[Read: Growth v/s Value Investing: Which Is Better Of The Two In Current Times?]

Image 3: Stock Selection and Segmentation

(Source: Union Large & Midcap Fund Product Brochure-Presentation)

So, the performance of the Union Large & Midcap Fund relies on the construction of the portfolio. How the fund manager will construct the portfolio, amidst the extreme turbulence, as constructing the portfolio would not be easy and may inflict high-risk.

As mentioned earlier, Q2 India Inc’s earnings of a number of heavyweights of bellwether index –the Nifty 50–were in line with street expectations or have beat the estimates. Ostensibly it is their best operational performance in more than two years even amid the economic slowdown. 

But amid a scenario where wage growth has slowed, economic growth has slowed and is expected to slow further, the credit risk is high, people are losing jobs, there are losses due to inundation caused by incessant rainfall in many parts of the country, among a host of other factors; it would weigh on corporate earning even as the credit tap is opened.

But the valuations don’t justify the earnings. The trail P/E of the S&P BSE Sensex and the large-cap index is currently at 27.3x and 27.4x. Likewise, even the mid-cap space, after some correction, the P/E multiple is at 25.4x.

[Read: Market P/E Ratio Driving Your Mutual Fund Decisions? Big Mistake!]

Thus, investors need to approach cautiously without compromising on long-term growth, and avoid getting swayed by the forward statements in the earnings. Sadly, the oldest trick in the book of ‘estimating earnings’ played out is that the near-term estimates are being toned down while the future earnings estimates are increased.

The impact of corporate earnings on your mutual fund portfolio would be hinged on the portfolio characteristics of the schemes you hold in your portfolio. Hence, set realistic post-tax return expectations; don’t get carried away and invest accordingly.

[Read: Why It Is The Best Time To Build A Strategic Mutual Fund Portfolio To SIP Into]

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