Most large firms offer stability, have strong balance sheets as moats and form a part of the index. With growth opportunities on the horizon Principal Mutual Fund launches Principal Large Cap Fund, an open-ended scheme that will invest in large cap stocks which are the first 100 companies in terms of full market capitalization along with top USA companies with market cap greater than $50 billion.

When you plan for long-term goals and want the stability of large-caps with average return potential with less volatility, if you have the stomach for moderately high risk, you may skew your equity portfolio to a large-cap fund.

Principal Large Cap Fund being an equity fund has high risk that will allocate more of its assets to large cap stocks, with a little allocation towards stocks that are not large cap, debt, and overseas securities. The fund house is of the view that by allocating the asset of the portfolio to US Large cap funds, it is “The Cherry on top” that will provide diversification and exposure to top major US players.

So it is suitable for investors who are seeking moderate returns at moderately high risk for an investment horizon of 3 to 4 years.

Graph: Risk-return matrix of Large cap funds

(Source: Principal Large Cap Fund’s presentation)

Table 1: Details of Principal Large Cap Fund

Type An Open-ended Equity scheme predominantly investing in Large Cap stocks Category Largecap Fund
Investment Objective To achieve long term capital appreciation by investing in a diversified portfolio predominantly consisting of equity and equity related securities of Large Cap companies including derivatives. 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
  • Regular
  • Direct
  • Growth*
  • Dividend
    • Pay-out
    • Reinvestment*
*Default option
Entry Load Nil Exit Load
  • If redeemed/ switched on or before 365 days from the date of allotment:
    • Nil for redemption/ switch out of units upto 24% of the units allotted (the limit)
    • 1% on redemption in excess of 24% of the limit stated above- Redemption of units would be done on First in First out Basis (FIFO)
  • Nil thereafter 365 days
Fund Manager
  • Mr Sudhir Kedia
  • Mr Anirvan Sarkar
Benchmark Index Nifty 100 Total Return Index
Issue Opens: September 28, 2020 Issue Closes: October 12, 2020

(Source: Scheme Information Document)

How will the scheme allocate its assets?

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

Table 2: PLF ‘s Asset Allocation

Instruments Indicative Allocation (% of Total Assets) Risk Profile
Minimum Maximum
Equity and equity related instruments of Large Cap Companies 80 100 High
Equity and equity related instruments of Other than Large cap Companies 0 20 High
Debt and Money Market Instruments including units of debt & liquid schemes 0 20 Low to Medium

(Source: Scheme Information Document)

What is the Investment Strategy ?

The strategy would endeavour to build a diversified portfolio of large cap companies across sectors. The universe for the large cap companies would be defined according to the extant SEBI guidelines.

The stock selection process would follow a combination of a bottom-up and top-down approach with a focus on the fundamentals, current valuations and the growth potential of the company.

While analysing companies, the fund manager may look at the:

  • Company’s business model
  • Its financial strength
  • The competitive advantages it enjoys
  • Its return ratios etc.

The fund identifies companies through rigorous fundamental analysis using both proprietary in house and third-party research. The fund may also invest upto 20% of the portfolio in foreign companies.

Who will manage Principal Large Cap Fund?

The equity portion of the Principal Large cap Fund will be co-managed by Mr Sudhir Kedia and Mr Anirvan Sarkar. Mr Sudhir Kedia will be the lead fund manager handling the scheme; Mr Anirvan will be the dedicated fund manager for foreign investments.

Mr Sudhir Kedia is a Chartered Accountant (CA), Cost and Works Accountant (CWA), and an MBA to his credit. He has over 13 years of experience in research and asset management business. He has a very strong research background and has a sound understanding of the fund management business. He has managed Hybrid strategies and other Multi cap portfolios in his earlier organisations.During his career, he has worked with Mirae India AMC and ASK Investment Managers, before joining Principal AMC as an Associate Fund Manager.Currently, at Principal Mutual Fund Mr Kedia co-manages/manages Principal Midcap FundPrincipal Personal Tax Saver FundPrincipal Tax Savings Fund and Principal Equity Savings Fund (Equity Portion).

Mr Anirvan Sarkar has done his Post Graduate Diploma in Computer Aided Malmanagement from IIM Calcutta. He has over 9 years of experience in sell side and buy side research. He has covered the banking and financial sector for 6 years as well as multiple other sectors prior to that. He has a very strong research background and has sound knowledge of equities markets.

The outlook for Principal Large Cap Fund.

In order to achieve the stated objective of the scheme, the fund managers will actively manage the scheme with inhouse research, using the 6 Pillar Investment Framework to construct the portfolio consisting stocks of Indian and US companies.

Diagram: Proposed Investment Approach

(Source: Principal Large Cap Fund’s presentation)

​Hence the performance of the Principal Large Cap Fund weighs on portfolio and risk management strategies the fund managers employ.

However, please note that the trailing 12-month P/E of the Nifty 500 and the Nifty 100 large-cap index is above 30 versus sub-20x levels at the end of March 2020. Although this reading is low compared to earlier periods; it would be incorrect to term it cheap. When weighed in context with corporate earnings, valuations appear expensive, particularly in the large-cap segment.

A point of caution is that India Inc.’s corporate earnings have been significantly impacted by the COVID-19 pandemic. For Q1FY21 and the ensuing few quarters as well, corporate earnings have largely been impacted due to the COVID-19 pandemic. Only a handful of heavyweights of the bellwether index have kind of lived up to D-street expectations.

The recovery would be slow and painful for most other companies, as India still hasn’t completely unlocked from the lockdown due to increasing COVID-19 cases. It might take a couple of years for complete normalcy to return, and until then the strain on earnings will be visible.

Even if it seems like an enticing opportunity to earn returns from depreciation in the value of INR against the USD by investing in top US firms, it is important to understand that both the markets have their own pros and cons when there is US Presidential election coming by. Therefore, whether to sign up for this fund or avoid will depend on your preference, suitability, and risk appetite as an investor.

In such a scenario, set realistic post-tax return expectations from your investment portfolio. Don’t get carried away by the earnings trap (where often the near-term estimates are being toned down, while the future earnings estimates are increased).

This article first appeared on PersonalFN here

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