Earlier in January this year, I wrote a piece proposing investment in Large Cap Funds amid frothy valuations in the lower rung of the market capitalisation, i.e. mid caps and small caps.
Large caps, as you may know, are the top 100 companies on a market capitalisation, which are well-established (with over Rs 200 billion in market value as per SEBI’s categorisation), financially sound, and liquid on a relative basis.
In the last one year, many large cap companies have created remarkable wealth for investors and turned multi-baggers. Large cap stocks, such as Trent, PFC, Hindustan Aeronautics, Bharat Electronics, Coal India, Bajaj Auto, M&M, Bharat Forge, Tata Power, Tata Motors, and many others have more than 100% returns in the last one year, as per equitymaster.com data.
In the case of certain companies – for instance, Tata Motors – the profitability as per PAT has surged more than 1,200% on a consolidated basis compared to FY23. Likewise, in the case of Tata Power, the PAT in FY24 increased by over 400% from FY23. Many other large cap companies have reported stupendous profits as against FY23.
So, given the manifold increase in PAT numbers or corporate earnings of large cap companies, the BSE 100 Total Return Index has also gone up nearly 34% in the last one year and outperformed the bellwether BSE Sensex TRI by around 7% (as of June 27, 2028).
Graph 1: Large Caps in Focus in the Last One Year
Index values based on Rs 10,000
Data as of June 27, 2024
Past performance is not an indicator of future returns.
(Source: ACE MF, data collated by PersonalFN Research)
As seen in the graph above, after moving almost flat from June 2021 to June 2023, the spotlights have turned on large cap stocks, perhaps on concerns of valuations of smaller companies, i.e. the mid caps, small caps, and micro caps.
This has the potential to take the BSE Sensex, which also represents large companies, to further highs if the momentum continues (backed by investor participation) across the sector representation of the large cap, BSE 100 index. Thus, the undercurrents currently are in favour of large caps from a strategic standpoint.
How Have Large Cap Funds Fared?
Quite a few Large Cap Funds (irrespective of their Assets Under Management) have come out of the shadows of underperformance in the last one year (based on rolling returns) with positive undercurrents.
Table 1: Performance of Large Cap Mutual Funds
| Scheme Name | Absolute (%) | CAGR (%) | Risk Ratios | |||||
| 6 Mths | 1 Yr | 2 Yr | 3 Yr | 5 Yr | SD Annualised | Sharpe | Sortino | |
| Nippon India Large Cap Fund | 18.65 | 32.40 | 22.20 | 26.85 | 17.37 | 13.71 | 0.38 | 0.79 |
| JM Large Cap Fund | 19.60 | 30.83 | 17.72 | 19.72 | 15.74 | 13.48 | 0.33 | 0.67 |
| Bank of India Bluechip Fund | 19.98 | 30.10 | 14.66 | — | — | 14.83 | 0.24 | 0.47 |
| Quant Large Cap Fund | 22.63 | 30.07 | — | — | — | 14.29 | 0.41 | 0.91 |
| HDFC Top 100 Fund | 16.64 | 28.54 | 19.13 | 23.36 | 15.63 | 13.07 | 0.31 | 0.65 |
| ICICI Pru Bluechip Fund | 17.42 | 28.45 | 17.70 | 22.38 | 16.97 | 12.42 | 0.34 | 0.69 |
| Invesco India Largecap Fund | 17.47 | 27.58 | 14.25 | 20.20 | 16.07 | 14.19 | 0.27 | 0.54 |
| ITI Large Cap Fund | 17.58 | 27.51 | 14.61 | 17.18 | — | 13.82 | 0.24 | 0.49 |
| Baroda BNP Paribas Large Cap Fund | 17.38 | 27.18 | 16.14 | 19.72 | 17.51 | 12.86 | 0.30 | 0.62 |
| Edelweiss Large Cap Fund | 15.50 | 26.47 | 16.15 | 20.16 | 16.63 | 12.88 | 0.29 | 0.57 |
| BSE 100 – TRI | 13.89 | 22.10 | 13.77 | 19.12 | 15.34 | 13.61 | 0.23 | 0.48 |
| BSE SENSEX – TRI | 10.83 | 18.44 | 12.26 | 17.40 | 14.87 | 13.38 | 0.20 | 0.41 |
| NIFTY 100 – TRI | 14.01 | 20.97 | 12.47 | 18.03 | 14.70 | 13.85 | 0.22 | 0.45 |
| NIFTY 50 – TRI | 12.15 | 19.85 | 12.55 | 18.01 | 14.84 | 13.45 | 0.20 | 0.43 |
Data as of June 27, 2024
The list is not exhaustive, only top funds are considered out of the total of ~30 Large Cap Funds.
Returns expressed are daily rolling returns in %. calculated using the Direct Plan-Growth option.
Standard Deviation indicates Total Risk and Sharpe Ratio measures the Risk-Adjusted Return. They are calculated over 3 years assuming a risk-free rate of 6% p.a.
*Please note, that this table represents past performance. Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendatory.
Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, data collated by PersonalFN Research)
Schemes such as Nippon India Large Cap Fund, HDFC Top 100 Fund, ICICI Pru Bluechip Fund, BNP Paribas Large Cap Fund, and Edelweiss Large Cap Fund have not just outperformed in the last 6 months and 1 year rolling returns, but even over 3 years and 5 years have clocked noticeable alpha, thus compensating investors decently on a risk-adjusted basis.
Table 2: Outperformance/Underperformance of Large Cap Funds Across Time Periods
| 6 months | 1 Year | 2 Year | 3 Year | 5 Year | |
| No. of schemes Outperformed | 17 | 22 | 19 | 12 | 10 |
| No. of schemes Underperformed | 6 | 5 | 6 | 4 | 4 |
| No. of schemes that gave similar returns to benchmark | 7 | 3 | 4 | 11 | 12 |
| Total no. of schemes | 30 | 30 | 29 | 27 | 26 |
Data as of June 27, 2024
Based on daily rolling returns, calculated using the Direct Plan-Growth option
*Please note, that this table represents past performance. Past performance is not an indicator of future returns.
Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, data collated by PersonalFN Research)
The table above shows that a majority of the Large Cap Funds outperformed the BSE 100 TRI on 6-month and 1-year rolling returns. But over 3-year and 5-year rolling returns, the count of the outperforming one was just 12 (i.e. 44% of the total) and 10 (i.e. 38% of the total), respectively.
The rest of them either delivered returns similar to the BSE 100 TRI or underperformed. This underscores the need for prudent selection when you are adding equity mutual fund schemes to your portfolio.
What Has Worked in Favour of Certain Large Cap Funds’ Outperformance?
Certain heavyweight stocks that are common in the underlying portfolios of Large Cap Funds have clocked appealing returns (see Table 3).
Table 3: Returns and Market Value of Common Stocks Held by Large Cap Funds
| Company | 1-Yr Returns (%) | Market Value of holding (Rs Cr) |
| NTPC Ltd. | 106.6 | 3,952 |
| ICICI Bank Ltd. | 31.1 | 9,767 |
| Maruti Suzuki India Ltd. | 28.1 | 3,674 |
| Reliance Industries Ltd. | 24.9 | 8,484 |
| Infosys Ltd. | 24.0 | 4,995 |
| HDFC Bank Ltd. | 3.9 | 8,629 |
Portfolio data as of May 2024.
1-year returns of stocks as of June 27, 2024
Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendatory.
Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, data collated by PersonalFN Research)
Other than these stocks, even the ones that are unique in the respective portfolio of the Large Cap Funds have also fared well.
Moreover, certain fund managers have actively managed weights in the certain underlying stocks of their Large Cap Funds, veering from the earlier practice of index hugging. In other words, they have refrained from maintaining similar weights, at least in their top 10 stocks. Certain Large Cap Funds by exploring opportunities beyond the top 100 companies, i.e. BSE 200 or others have gained.
For example, Quant Large Cap Fund, which is one of the top performers in the last 1 year, other than the heavyweight Reliance Industries, has exposure to stocks such as Adani Power, Tata Power, United Spirits, Jio Financial Services, etc., that have clocked handsome returns.
Therefore, certain Large Cap Funds have taken tactical portfolio calls sensing the mood and momentum. Moreover, the rally in heavyweight PSU stocks has also benefitted Large Cap Funds.
The question now is: Will Large Cap Funds Continue to Do Well?
Well, volatility in the Indian equity market has reduced after the Lok Sabha election results, which gave the Modi-led-NDA the third term. The markets are scaling new highs on the back of policy continuity and certain big-bang reforms in the upcoming full budget in July 2024.
Valuation-wise large caps seem to be offering a better margin of safety compared to mid caps and small caps. The P/E ratio of the BSE 100 Index is around 23x, while that of the BSE Mid Cap Index and BSE Small Cap Index is much higher at around 32x and 37x, respectively.
Graph 2: India’s Marketcap-to-GDP Ratio
For illustration purposes only.
Data as of June 28, 2024.
Source: https://www.gurufocus.com/global-market-valuation.php?country=IND
India’s market capitalisation-to-GDP ratio, famously called the Buffett indicator (named after legendary investor Warren Buffett), is now at 105.33% in the modestly overvalued zone (although down from the recent 10-year high of 119.68%.
For any reason, if the Indian equity market falls or corrects from the lifetime high, the mid caps and small caps may be more vulnerable.
At this point, large caps seem a better option to approach Indian equities. It would be wise to hold some of the best Large Cap Mutual Funds in your core portfolio.
The term ‘Core’ refers to more stable and long-term holdings, and typically, these should be around 65%-70% of the equity mutual fund portfolio.
The five key advantages of owning Large Cap Funds are that…
- The fund manager makes informed decisions for you, the investor
- You get exposure to large, well-established companies and financially sound companies
- Large caps are highly liquid
- Potentially offer relatively stable returns and steady growth in the long run with lesser risk (than mid caps and small caps)
- During an economic slowdown, Large Cap Funds tend to witness lower downside risk compared to Mid Cap Funds and Small Cap Funds
Large Cap Funds that follow robust investment processes and systems hold the potential to generate meaningful alpha over the benchmark.
Want to know which are the 4 Best Large Cap Funds for 2024? Watch this video:
Other than Large Cap Funds, you may also consider adding some of the best Value/Contra Funds and Flexi-cap Funds as part of your core equity mutual fund portfolio.
Make sure you have the stomach for high risk and an investment time horizon of around 5 years when approaching these equity mutual funds.
Other than that, for tactical asset allocation to equity, debt, and gold, a Multi-Asset Fund would also be a meaningful choice now at a market high.
Follow a sensible approach and wisely structure your mutual fund portfolio (based on your age, risk profile, broader investing objective, the financial goal/s you are addressing, and investment time horizon) to potentially earn optimal risk-adjusted returns.
Be a thoughtful investor.
When in doubt, don’t hesitate to reach out to a SEBI Registered Investment Advisor.
Happy Investing!
This article first appeared on PersonalFN here
