Large-cap funds struggle to beat benchmarks

Mutual funds have witnessed copious inflows over the last one year. But investors who bet their money on large-cap funds might not be too happy, for many actively managed large-cap funds have fared worse than their benchmark indices.

A BusinessLine analysis on the out-performance of equity diversified large-cap funds (number of funds that generated positive returns over the benchmark return) in the last one year shows that only 40 per cent of the funds in the category delivered higher returns than their corresponding benchmarks.

This is in contrast to the previous two years — 2016-17 and 2015-16 — when 80 and 86 per cent of the funds outperformed their benchmarks, respectively.

Edgy at higher levels

Thirty-five funds with the S&P BSE Sensex and Nifty 50 as benchmarks were considered for the study.

The under-performance could be due to the relatively smaller universe for pure large-cap funds. While abundance of information in this segment makes it easier for fund managers to pick the winners and avoid losers, they are compelled to go heavily overweight or underweight in a few sectors or stocks.

If the sector or stock calls do not work, beating benchmarks becomes difficult.

According to Deepak Jasani, Head of Retail Research, HDFC securities: “The Nifty 50 is the most popular benchmark for large-cap funds followed by the BSE 100 and BSE 200.

Fund managers’ bias

When compared to their benchmarks, large-cap funds are under-invested in TCS, Reliance, ONGC, Coal India, Wipro and ITC and over-invested in ICICI Bank, L&T and Infosys.

“This is due to biases of the fund managers. Some of the under-invested stocks have surprisingly done well resulting in under-performance of most large-cap funds.”

The under-performance is worse when the total returns index is considered. Only 29 per cent of the large-cap funds outperformed their total return indices in the last one year. “Lately IT, realty and FMCG indices have done well whereas auto, healthcare and bankex have underperformed,” Jasani adds.

Managing copious inflows into funds amidst skyrocketing valuations has not been easy either. Many funds in the large-cap category such as Quantum LT Equity Fund and JM Equity are sitting on piles of cash for want of opportunities.

Though this strategy helps the fund managers contain losses better when the market corrects, it has dragged down returns in the rally last year.

Among the funds with a higher corpus in the large-cap category, IDFC Focused Equity Fund, AXIS Focused 25 Fund, and Tata Retirement Savings Fund—Progressive plan managed to outperform their benchmarks by a margin of 8-15 per cent. On the other hand, LIC MF Equity Fund, Quantum Long-Term Equity Fund and Franklin India Bluechip Fund showed a tepid performance — lagging 7-10 per cent behind their corresponding benchmark returns.

Large-cap funds are meant for investors who prefer lower risk exposure. However, if the under-performance continues, they could look at index funds or index ETFs, where the expense ratios are lower and trailing errors are minimum.

For investors with a slightly higher risk appetite, multi-cap funds could be the right option, Jasani adds.

Mid-cap funds fare better

Mid- and small-cap funds have, however, given higher returns to investors, with most funds managing to beat their benchmarks.

About 70 per cent of the funds in the mid- and small-cap categories outperformed their corresponding benchmarks.

However, in the previous two years, they put up a poor show — only 47 and 48 per cent of the funds outperformed their benchmarks in the years ended February 21, 2017 and 2016.

COMMENT NOW