Large-cap indices Sensex and Nifty have rallied well. But there is still a case for investing in large-cap funds.

First, the large-cap indices are not very expensive yet. The benchmark indices Sensex and Nifty still trade below their peak valuations. For instance, the Nifty index now trades about 16 times its trailing twelve-month earnings, lower than its peak multiple of almost 25 times. Second, should the economy see meaningful recovery, one can expect earning upgrades for large-cap stocks. As earnings improve, stock prices can trend up even without an increase in valuations.

Third, if you believe that the market may cool off a bit after the impressive rally witnessed over the last eight months, large-cap funds may be a good way to reduce the impact of market volatility on your portfolio.

Investment in a large-cap fund with a good track record may help you diversify risk.

UTI Equity Fund has weathered volatility better than its benchmark, the BSE 100 Index, during corrective phases.

Barring the 2009-10 recovery phase, the fund has outpaced the benchmark during recovery rallies in the last five years. Almost 80 per cent of the scheme’s assets are currently invested in large-cap stocks. The fund scores high on consistency, too. In the last five years, it has been successful in delivering returns higher than the BSE 100 almost 89 per cent of the time. A monthly investment in the fund would have yielded gains in excess of 13 per cent over the past five years.

Proven performer

Despite the short bouts of underperformance, UTI Equity has managed healthy performance over three-, and five-year timeframes. A quick course correction helped the fund recoup lost ground. For instance, high allocation to IT stocks in the early part of 2014, when the rupee began to strengthen, impacted performance. However, the fund’s swift move to reallocate assets to cyclicals, such as financials and construction, helped narrow the underperformance. In the last eight months, the fund has pared exposure in defensives and export-oriented themes such as IT, pharma, auto and consumer goods. It has increased allocation to cyclical sectors such as financials, construction, metals and minerals. It currently holds 73 stocks in its portfolio.

Published on June 1, 2014