Mutual Funds

One more large-cap fund

K. Venkatasubramanian | Updated on June 08, 2014


A stable large-cap portfolio that delivers returns without high levels of volatility is generally preferred by investors with a moderate risk appetite.

Catering to this section of investors is the new fund — JP Morgan India Top 100, which would invest mostly in stocks from the BSE 100 basket and against which index it would be benchmarked as well.

With a new government in place, hopes are high for a revival in the economy and structural reforms in several areas such as infrastructure, governance and agriculture.

The fund hopes to gain from the rub-off effect this would have on India Inc’s earnings. Of course, over the past few months there has been a sustained rally.

Mid-caps have led the way and witnessed a spectacular upswing.

But these stocks and funds do come with attendant volatility and can correct deeply if positive fundamental and macro news flow is not sustained.

Lower volatility

It is here that large-cap stocks come to the fore, given their lower volatility and better earnings visibility.

Most of the stocks from the BSE 100 basket tend to have manageable to low debt-equity, better return on equity and operating margins than mid-cap shares. There is also a certain degree of anchoring in valuations as well. A report from brokerage firm Motilal Oswal indicates that even on a one-year forward basis, the Sensex is valued at a price-earning multiple of a little over 15 times.

The fund hopes that there would be an earnings upgrade from FY16 in case of improvement in the overall economy and business fundamentals brighten up. As a result, large-cap stocks as a basket would not be that expensive compared with historic averages.

Another advantage of investing in large-cap stocks is that the level of corporate governance and disclosure is quite high.

FIIs too tend to rush first to the large well-established names, which is important given the kind of flows that they bring in and its effect on liquidity and stock price movement.

An interesting comparison done by the fund reveals why investors with a moderate risk appetite should go for large names.

Now, TCS VS KPIT, ITC VS Marico, SBI VS UBI and Ultratech Vs JK Lakshmi have been compared over the past three- and five-year periods.

Though the mid-cap names may have delivered equal or in some cases slightly more returns, on a risk adjusted basis, the conclusion is the large-cap names clearly stand out.

Other options

There are funds such as ICICI Pru Top 100 and Birla Sun Life Top 100, which have a fantastic long-term track record, while DSPBR Top 100 has delivered above-average returns.

Apart from these, there is a whole host of large-cap funds with established performance records.

In this regard, JP Morgan India Top 100 fund may not be able to offer something substantially different from what ICICI Pru Top 100 and Birla Sun Life Top 100 already have.

In any case going with established schemes would be a better idea than taking the plunge during the NFO.

Published on June 08, 2014

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