Welcome to PersonalFN’s weekly analysis on diversified equity mutual funds! In this issue, we have analysed HDFC Large & Mid Cap Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

HDFC Large & Mid Cap Fund is one of the oldest equity schemes in India that has shown a turnaround growth in the last couple of years by realigning its investment strategy. It holds a large-sized portfolio of diverse stocks and follows a buy-and-hold investment approach in quality businesses.

What is the growth of Rs 10,000 invested in HDFC Large & Mid Cap Fund five years ago?

Past performance is not an indicator of future returns
Data as of November 01, 2023 

Launched way back in February 1994, HDFC Large & Mid Cap Fund was previously known as HDFC Large Cap Fund. Despite the fact that HDFC Large & Mid Cap Fund is one of the oldest equity schemes in India, the past performance may not be comparable as the fund was originally a large-cap-oriented fund that invested over 90% of its assets in large-cap stocks. However, after SEBI introduced the categorisation norms in 2018, the fund was repositioned to the current Large & Mid Cap Fund mandate.

The fund avoids betting on momentum-driven stocks and instead focuses on identifying fundamentally sound stocks that have healthy long-term growth potential. It has also shown a slight tilt towards the value style of investing. Notably, the performance of the fund until a few years back was mediocre, and it often significantly trailed the benchmark and its peers.

However, HDFC Large & Mid Cap Fund started recording turnaround performance in the latter half of 2020 when the equity market witnessed a broad-based rally. It now stands among the top performers in the Large & Mid Cap Fund category across time frames. The fund’s recent splendid growth has brought it under the limelight and its corpus has more than tripled to Rs 11,810 crore in the last two years.

The fund has created an impressive track record under its current fund manager Mr Gopal Agarwal who took charge of the fund in July 2020. In the last five years, HDFC Large & Mid Cap Fund has registered growth at a CAGR of 18%, compared to a growth of 16.9% in the Nifty LargeMidcap 250 – TRI index. An investment of Rs 10,000 in HDFC Large & Mid Cap Fund five years back would have now appreciated to Rs 22,917, which is higher than the valuation of Rs 21,790 for a simultaneous investment in the benchmark index.

How has HDFC Large & Mid Cap Fund performed in the past?

How has HDFC Large & Mid Cap Fund performed in the past?

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year Std Dev Sharpe
HDFC Large and Mid Cap Fund 11,198 18.48 11.75 31.19 18.03 14.90 16.28 0.43
ICICI Pru Large & Mid Cap Fund 9,365 14.09 10.96 30.65 17.53 14.74 15.47 0.44
SBI Large & Midcap Fund 14,682 9.95 10.75 27.08 17.50 14.61 15.06 0.39
Kotak Equity Opp Fund 15,013 13.99 10.85 24.37 18.45 15.24 13.96 0.38
DSP Equity Opportunities Fund 8,869 13.87 7.08 24.07 16.69 13.87 14.89 0.36
Axis Growth Opp Fund 9,686 15.80 5.53 23.83 19.69 16.74 0.31
Mirae Asset Emerging Bluechip Fund 28,439 12.86 4.86 23.20 18.81 16.62 14.84 0.35
Sundaram Large and Mid Cap Fund 5,477 9.02 4.86 23.02 15.73 14.02 15.26 0.35
Canara Rob Emerg Equities Fund 17,939 6.82 4.47 21.64 16.85 14.80 14.83 0.32
Aditya Birla SL Equity Advantage Fund 5,244 8.19 -1.48 17.91 13.17 10.34 17.20 0.23
NIFTY LargeMidcap 250 – TRI 12.98 8.22 25.18 16.85 14.72 15.74 0.35

The securities quoted are for illustration only and are not recommendatory.
Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as of November 01, 2023
(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 before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

Historically, HDFC Large & Mid Cap Fund witnessed a prolonged phase of lacklustre growth, which can be attributed to the change in its investment strategy (shifting from large-cap to large & mid-cap) as well as instability in the fund management team during that timeframe. Nonetheless, HDFC Large & Mid Cap Fund has made a comeback with robust gains in the last couple of years. Notably, in the last 1-year, 2-year, and 3-year periods, HDFC Large & Mid Cap Fund has outpaced the benchmark Nifty LargeMidcap 250 – TRI as well as the category average by around 3.5 to 6.5 percentage points.

The recent superior growth has improved its long-term performance numbers as well. Over the longer 5-year and 7-year periods, the fund is now showing an outperformance over many of its peers and has exhibited reasonable growth compared to the benchmark index.

The fund has also been reasonable when it comes to managing risks. Its standard deviation (16.28%, annualised) is slightly higher than that of its benchmark (15.74%, annualised) and the category average (15.33%, annualised). However, in terms of risk-adjusted returns (as denoted by the Sharpe ratio), HDFC Large & Mid Cap Fund has distinctly outperformed its benchmark and the category average by a significant margin.

[Read:  Best Large & Mid Cap Mutual Funds to Invest in 2023 – Top Performing Large & Mid Cap Mutual Funds in India]

What is the investment strategy of HDFC Large & Mid Cap Fund?

Under its current investment mandate since 2018, HDFC Large & Mid Cap Fund invests 35-65% of its total assets in large caps (top 100 companies) along with 35-65% in mid caps (companies ranking 101st to 250th). The fund aims to identify and invest in a diversified portfolio of strong growth companies based on the prevailing market environment. It also seeks to capture opportunities across value and turnaround companies.

While picking stocks, HDFC Large & Mid Cap Fund lays emphasis on companies which:

– are likely to achieve above-average growth

– enjoy distinct competitive advantages

– have superior financial strength

– are trading at relatively attractive valuations, and/or

– have value unlocking potential

The fund follows a mix of ‘top-down’ and ‘bottom-up’ strategy for theme and stock selection. HDFC Large & Mid Cap Fund holds a large portfolio of over 150 stocks which can be attributed to higher allocation to mid and small-caps and a steadily rising asset size. HDFC Large & Mid Cap Fund prefers to stay invested in each of its holdings with a long-term view to derive their full potential. Following a buy-and-hold investment strategy, the fund manager avoids unnecessary portfolio changes and refrains from chasing momentum. Moreover, the fund is cautious in its approach, which helps it to perform well even during uncertain market phases. HDFC Large & Mid Cap Fund usually remains fully invested across market cycles, taking very limited cash calls.

What are the top portfolio holdings in HDFC Large & Mid Cap Fund?

Graph 2Graph 2

Holding in (%) as of September 30, 2023
(Source: ACE MF) 

Amid a sharp rise in its AUM over the past couple of years, HDFC Large & Mid Cap Fund now holds a large-sized portfolio of around 150-170 stocks, compared to the 60-80 stocks held by its peers. As of September 30, 2023, HDFC Large & Mid Cap Fund held 168 stocks in the portfolio with the top 10 stocks accounting for 23.2% of its assets. Notably, among the top 10 holdings of the fund, four stocks are from the Banking sector. HDFC Large & Mid Cap Fund has a long tail of around 140 stocks having an allocation of less than 1% in each. These stocks collectively account for nearly 54% of its assets. It also has a minor allocation of 1.4% in Rights.

HDFC Large & Mid Cap Fund’s strategy revolves around a long-term perspective for the majority of its stock holdings, with a portfolio turnover typically below 20%. This reflects the strong conviction the fund manager has in his stock picks.

In the last two years, HDFC Large & Mid Cap Fund benefitted the most from its holdings in Bharat Electronics, Titagarh Railsystems, NTPC, Tata Motors, The Indian Hotels Company, ICICI Bank, Tata Motors – DVR Ordinary, L&T, ITC, and SBI that contributed around 20% to its absolute gains. Trent, Solar Industries India, Sun Pharma, NHPC, Power Finance Corporation, Timken India, Apollo Tyres, and Macrotech Developers were among the other top contributors to its gains.

HDFC Large & Mid Cap Fund avoids actively rotating sectoral calls. It usually holds higher exposure to Banking & Finance, Engineering, Auto & Auto Ancillaries, and Infotech sectors. Collectively, these sectors presently account for 56.8% of its assets. It also holds significant exposure to Pharma, Consumption, Petroleum, Power, and Oil & Gas, having allocation in the range of 2-7%. Although the portfolio is skewed towards cyclicals, it maintains a reasonable level of diversification across defensive and sensitive sectors as well.

Is HDFC Large & Mid Cap Fund suitable for my investment goals and risk tolerance?

HDFC Large & Mid Cap Fund’s historical performance was rather unimpressive, leaving little impact on investors. However, amid a broad-based market rally seen since 2020 onwards, the fund has registered robust growth and has created a noteworthy performance track record. The fund now stands among the category-toppers across short to long-term time frames. Its focus on high-conviction growth-oriented stocks that are available at reasonable valuations has enabled it to make a mark for itself.

HDFC Large & Mid Cap Fund avoids taking concentrated bets at stock and sector levels and focuses on creating a diverse portfolio. It places a strong emphasis on risk management to offset the impact of higher volatility associated with mid and small-cap stocks. With an experienced fund manager at the helm and backed by a process-driven fund house, HDFC Large & Mid Cap Fund appears capable of generating sound risk-adjusted returns in the long run.

HDFC Large & Mid Cap Fund is suitable for investors looking for a well-diversified and growth-oriented Large & Mid Cap Fund with an investment horizon of at least 5 years.

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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