The year 2020 is expected to bring in economic recovery. Fortunes of mid cap companies are closely tied to economic growth. As a result, quality mid cap stocks across different industries available at attractive valuations can prove to be multi-baggers. Meanwhile, revival in economy may also benefit some of large cap stocks that were beaten down in the last couple of years. Large caps as a category may continue to be safe bet for investors. Investing in large & midcap fund may therefore prove to be a worthwhile proposition.

DSP Equity Opportunities Fund (DEOF) is one such large & midcap fund that aims to generate capital appreciation from a portfolio of large and midcap companies.

The fund was launched in May 2000 and currently has an asset size of Rs 5,589, one of the largest in the large & midcap fund category. DEOF is managed by Mr Rohit Singhania (Since June 2015) while Mr Jay Kothari is the dedicated fund manager for overseas investment.

Graph 1: Growth of Rs 10,000 if invested in DSP Equity Opportunities Fund 5 years ago

Graph 1: Growth of Rs 10,000 if invested in DSP Equity Opportunities Fund 5 years ago

 Data as on January 08, 2019
(Source: ACE MF)

DEOF has exhibited sound performance in the last five years. If you had invested Rs 10,000 in DEOF five years back on January 08, 2015, it would have appreciated to Rs 17,287 now (as calculated on January 08, 2020) at a compounded annualised growth rate of 11.6%. In comparison, a simultaneous investment of Rs 10,000 in its benchmark Nifty LargeMidcap 250 – TRI would now be worth Rs 15,874 (a CAGR of 9.7%). Over the last five years the fund has generated decent lead over the benchmark. Even though the lead tapered during the volatile market phase of 2018, the fund managed to regain it in the following year.

Graph 2: DSP Equity Opportunities Fund’s year-on-year performance

Graph 2: DSP Equity Opportunities Fund's year-on-year performance

 *YTD as on January 08, 2019
(Source: ACE MF)

Launched in May 2000, DEOF has a performance track record of close to two decades. The year-on-year performance comparison of DEOF with respect to its benchmark Nifty LargeMidcap 250 – TRI shows that the fund outperformed the index in 6 out of last 10 calendar years. The fund participated well in most market rallies and generated superior returns over the index. While the fund was able to manage the downside during the CY 2011 market slide, it struggled to do so in CY 2018 and trailed the benchmark. Its performance improved significantly in CY 2019 and the fund managed to outpace the benchmark by over 5 percentage points. In the current year, the fund’s performance till now is nearly in line with the benchmark.

Table: DSP Equity Opportunities Fund’s performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) Std Dev Sharpe
Mirae Asset Emerging Bluechip 9,229 8.09 8.64 17.54 21.56 14.41 0.21
Invesco India Growth Opp Fund 2,239 4.86 10.33 15.38 14.98 12.60 0.23
Sundaram Large and Mid Cap Fund 953 5.19 9.48 15.11 14.79 13.56 0.18
Canara Rob Emerg Equities Fund 5,339 0.82 5.68 14.95 19.41 15.14 0.16
LIC MF Large & Midcap Fund 603 3.24 6.81 14.94 NA 13.58 0.17
Principal Emerging Bluechip Fund 2,117 -2.53 3.56 13.35 17.23 15.21 0.12
Kotak Equity Opp Fund 2,928 5.69 6.09 13.32 14.58 12.75 0.16
Essel Large & Midcap Fund 105 5.62 5.53 13.29 NA 14.04 0.12
DSP Equity Opportunities Fund 5,589 3.23 5.02 12.77 14.32 13.80 0.13 
Edelweiss Large & Mid Cap Fund 489 3.64 8.34 12.34 12.48 12.37 0.19
IDFC Core Equity Fund 2,781 -0.69 4.39 12.32 12.31 13.44 0.11
Tata Large & Mid Cap Fund 1,568 7.75 7.32 11.69 13.33 12.29 0.16
SBI Large & Midcap Fund 2,847 3.17 6.41 11.42 13.46 12.93 0.14
ICICI Pru Large & Mid Cap Fund 3,567 1.54 3.56 10.60 10.23 12.47 0.07
L&T Large and Midcap Fund 1,351 -3.79 1.80 10.29 11.31 14.28 0.09
Aditya Birla SL Equity Advantage Fund 5,070 -1.75 0.89 9.83 13.66 15.30 0.09
HDFC Growth Opp Fund 1,374 1.98 3.94 9.24 7.07 13.50 0.08
Quant Large & Mid Cap Fund 4 -1.74 0.55 8.92 16.01 12.96 0.03
Franklin India Equity Advantage Fund 2,608 -0.63 3.46 8.42 11.16 12.53 0.06
BOI AXA Large & Mid Cap Equity Fund 176 -5.42 1.43 8.21 8.49 16.06 0.08
Nifty LargeMidcap 250 Index – TRI 0.12 5.43 12.46 12.89 14.08 0.13

Returns are on a rolling basis and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr arecompounded annualised.
Data as on January 08, 2020
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

DEOF outperformed the benchmark and category average across rolling period, except 2-year rolling period where its performance was nearly in line with the index and peers. Over the longer time horizon of 5-year rolling period, the fund’s outperformance was of around 2 percentage points.

The fund stood ahead of many of its peers on 1-year, 2-year, 3-year and 5-year rolling return basis. Mirae Asset Emerging Bluechip FundInvesco India Growth Opportunities FundSundaram Large and Mid Cap Fund and Canara Robeco Emerging Equities Fund were among the category toppers during this period.

In terms of risk-return profile, the fund’s volatility has been reasonable and it has managed to reward investors with decent risk-adjusted returns.

Investment strategy of DSP Equity Opportunities Fund

Categorised as large & midcap fund, DEOF is mandated to invest minimum 35% of its assets each in equity and equity related instruments of large and mid cap companies. It can invest up to 30% of its assets in other equity instruments, as well as debt and money market instruments. Accordingly, the fund invests in a portfolio of predominantly large and mid cap stocks. The fund is sector agnostic to identify best opportunities across industries. DEOF actively manages the portfolio along with some tactical calls taken to capitalize on market trends. The fund uses both `top-down’ and `bottom-up’ approach to identify growth and value stocks.

The investment direction is guided by the investment manager’s views on the macro economy with a particular focus on the micro impact of economic reforms, restructuring and mergers & acquisition activity. To stocks to be included in the investment universe is selected using in-house research focusing on the historical and current financial condition of the company, capital structure, business prospects, strength of management, responsiveness to business conditions, product profile, brand equity, market share, competitive edge, research and technological know-how and transparency in corporate governance.

Graph 3: Portfolio allocation and market capitalisation trend in DSP Equity Opportunities Fund

Graph 3: Portfolio allocation and market capitalisation trend in DSP Equity Opportunities Fund

 Holding (in %) as on December 31, 2019
(Source: ACE MF)

DEOF invests in a mix of large and midcap stocks though with a large cap bias. The fund’s large cap allocation in the last one year is in the range of 50-60%. Its midcap allocation has averaged 35% during the period. DEOF also seeks opportunities in small caps where it has allocated 3-7% of its assets. In the last one year the fund has gradually marked down its exposure in small caps while the allocation towards large cap has been increased due to high volatility seen in broader market. The fund remains fully invested in equities; its cash holdings have been under 6% mark.

Graph 4: Top portfolio holdings in DSP Equity Opportunities Fund

Holding (in %) as on December 31, 2019
(Source: ACE MF)

As on December 31, 2019 DEOF held a well-diversified portfolio of 61 stocks. The top 10 stocks constitute 41.7% of the portfolio. ICICI Bank has the highest stock allocation of 6.9%, followed by HDFC Bank at 6.8%. Notably, four stocks in the top 10 holding belong to banking sector. Infosys, Axis Bank and Bharti Airtel are the other major holding. Rest of the stocks in the top 10 holding have allocation in the range of 2-4%.

Sectorally, the fund has the highest exposure to Banks at 29%. Consumption and Engineering with allocation of around 7% each along with Petroleum Products and Infotech with allocation of around 6.5% each form the next highest sectoral allocation. The other prominent sectors include Pharma, Telecom services, Finance, Construction and Fertilisers.

Top contributors

Among the stocks in the portfolio, ICICI Bank contributed the most to the fund’s gains in the last one year with a weighted return of 4.7%. The fund also gained from its holdings in HDFC Bank, Bharti Airtel, PI Industries, Ipca Laboratories, Kotak Mahindra Bank, Reliance Industries, and SBI, among others.

On the other hand stocks like Apollo Tyres, Cummins India, Exide Industries, Mahindra & Mahindra Financial Services, Vedanta, etc. eroded some of its gains.

Suitability of DSP Equity Opportunities Fund

DEOF has performed reasonably well, especially during longer time horizons, delivering decent risk-adjusted returns. Though the fund holds a well-diversified portfolio of stocks/sectors, high concentration to Banking sector may lead to increased volatility if the sector comes under pressure due to any reason. The fund’s higher allocation to large and midcaps along with lower levels of exposure to small caps can help it create long term wealth though at a higher risk. This makes DEOF suitable for aggressive investors with investment horizon of at least 5 years or more.

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here

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