At a time when active large-cap funds seem to be regaining their mojo after a prolonged period of underperformance, there is increased interest in the space. Also, given the stupendous rally in the mid and small-cap market segments, and the resultant expensive valuations, large caps are viewed favourably.

Motilal Oswal Mutual Fund is coming out with a new large-cap scheme that opens for subscription on Wednesday (January 17), and the offer closes on January 31.

The large-cap fund’s space has seen a revival of sorts over the past year or so as most schemes outperformed the standard blue chip indices convincingly after many years of lackadaisical showing.

Most new investors start off with large-cap funds. Given that there are only 100 large-cap stocks to choose from, does the new fund offer make a case for investment? Read on to take an informed call.

What’s the fund about?

As a mainstay in most retail investor’s portfolios and as a critical component in many mutual fund sub-categories, large caps play a key role in reaching financial goals.

 However, after SEBI’s categorization norms came into effect in 2017-2018, with a few limited exceptions, the category has struggled to beat the Nifty 100 TRI and other such bluechip indices.

With just a 100-stock universe, generating alpha for investors is indeed a difficult ask. But these funds have staged a comeback over the past couple of years, with more funds juggling their portfolios by adding a bit of midcaps, overseas stocks and the like to move the needle on returns.

For starters, Motilal Oswal Large Cap fund looks to be truly active in managing the new scheme and seeks to have a 60-80 per cent active share – the extent to which its holdings would differ from the Nifty 100’s allocation to sectors and stocks.

The fund hopes to run a tight ship. It would invest in only 30 stocks, making it focused.

Interestingly, the fund has indicated that it would look to run an equal-weight portfolio with the same weightage given to individual stocks. The scheme seeks to invest in the 25 best performers of the Nifty 100 on an annual basis.

Outside the 80-85 per cent allocation to large caps, Motilal Oswal Large Cap would also invest in five stocks (potential multi-baggers) across the market cap and look at IPO/Pre-IPO and overseas listed stocks for the purpose.

With the Nifty 100 trading at a lower price-earnings multiple (23.75 times as of December 2023) than other mid and small-cap indices, it is relatively cheaper. However, at 16%, the Nifty 100’s RoE is higher than the mid and small-cap indices.

What should investors do?

Given the limited universe to invest from, outperforming the Nifty 100 TRI is challenging for large-cap fund managers. For most retail investors, it forms the core part of their portfolio for the long term.

However, some funds have still managed to consistently deliver outperformance. ICICI Prudential Bluechip, Nippon India Large Cap, Baroda BNP Paribas Large Cap and Canara Robeco Bluechip Equity are our preferred picks from the segment.

Investors can wait for the Motilal Oswal Large Cap fund to develop a track record before taking exposure. However, the fund house has outlined a clear process for stock selection and is looking to differentiate itself smartly from just benchmark hugging, apart from looking to invest in lower market cap and international stocks. If the fund house’s track record in managing other schemes pushes you to opt for the NFO, you can consider taking the SIP route by parking small sums periodically.

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