Two weeks ago, we advised our readers to invest in large-cap-oriented mutual funds and cut their exposure to small and mid-cap-oriented funds. The recent events in the market and growing risk to the global and Indian economy from geopolitical tensions reinforce our view that large-cap funds will outperform mid and small-cap funds in the forthcoming quarters after underperforming in the last 12 months.
The benchmark equity index BSE Sensex, which is a bellwether of large-cap stocks, is up 9.4 percent in the last one year, underperforming the BSE Mid-Cap and BSE Small-Cap index that had rallied 27.1 percent and 31.8 percent respectively during the period. The economic and growth conditions were however fairly benign in the last 12 months, especially in India. The domestic economy witnessed a moderation in the headline inflation and benchmark interest rate decline in the country during the period despite a rate hike and a rise in bond yields in the United States - the world's largest economy.
This provided a tailwind to equity valuation and also aided corporate margins. Mid and small-cap stocks benefited greatly from both these tailwinds leading them to outperform their large-cap peers.
The economic growth environment is now turning adverse with a rise in crude oil prices, a spike in bond yields in the US and a rise in bond yields in India after a steady decline in the first six months of the current calendar year.
The yield or interest rate on the 10-year government of India bonds is up by nearly 40 basis points in the last five months. Most analysts expect the trend to continue given the weakness in the rupee exchange rate, rising inflation and a decline in fresh investment by foreign portfolio investors (FPI). This is likely to weigh on the overall equity market in India but the biggest impact will be on mid and small-cap stocks. Big companies also tend to do financially better than smaller companies when the economic environment gets tough.
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Besides, large-cap stocks are now trading at a valuation discount compared to mid and small-cap stocks. For example, BSE Sensex is trading at a trailing 12-month price to earnings (P/E) multiple P/E 24.4X, against the BSE Mid-cap index trailing P/E of 25.7X and BSE Small Cap index of 30X currently. This has made large-cap stocks more attractive compared to mid and small-cap stocks.
All this will result in large-cap stocks outperforming the rest of the market in the coming months.
Mutual fund investors can gain from this trend by investing in top-performing and high-quality large-cap mutual funds.
Here are ten large-cap funds that have been the most consistent performers in the last five years and are expected to gain the most from a likely out-performance by large-cap stocks. The fund has been selected according to its composite ranking on the consistency of returns in the last five years, Sharpe Ratio, Sortino Ratio and Beta.
1. At the top is ICICI Prudential Bluechip Fund, one of the country's biggest equity schemes with assets under management (AUM) of nearly Rs 42,000 crore. The fund has given 18.6 percent returns in the last 12 months, nearly double the rise in Sensex during the period. The fund has also done well on a 3 and 5-year basis. The fund is also a winner in terms of risk-adjusted return parameters such as Sharpe Ratio, Sortino Ratio and Beta.
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2. The next fund in our list is HDFC Top 100 Fund - one of the oldest large funds in the industry with an AUM of nearly Rs 25,500 crore. The fund has given 20.3 percent returns in the last one year, more than twice the rise in the benchmark index during the period. The fund is also among the best in its category on quality parameters such as Sharpe Ratio, Sortino Ratio and Beta.
3. Nippon India Large Cap Fund has third best composite score in our analysis. The fund with an AUM has delivered a category-beating 21.1 percent return in the last one year. It has also done exceedingly well on a 3-year and 5-year basis. The fund also scores well on quality parameters such as Sharpe Ratio, Sortino Ratio and Beta.
4. Aditya Birla Sun Life Frontline Equity Fund comes next with 14.5 percent returns in the last one-year and 20.3 percent compounded annual returns in the last three years. The fund with an AUM of Rs nearly Rs 23,500 crore also does well on quality parameters such as Sharpe Ratio, Sortino Ratio and Beta.
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5. Tata Large Cap Fund is next in our ranking with 14.6 percent and 20.4 percent CAGR returns in the last one and three years respectively. The fund with an AUM of Rs 1628 crore is also among the top ten on parameters such as Sharpe Ratio, Sortino Ratio and Beta.
6. SBI Bluechip Fund is the sixth best large cap fund in our analysis with 15.6 percent and 21 percent CAGR returns in the last one-year and three-year respectively. The fund with an AUM of nearly Rs 40,000 crore is also top five in Sharpe and Sortino Ratio indicating superior risk-adjusted returns delivered by the fund.
7. Baroda BNP Paribas Large Cap Fund comes next in our list with 15 percent and 18.1 percent CAGR returns in the last one-year and three years respectively. The fund with an AUM of around Rs 1500 crore is also among the least volatile in the segment with a low Beta.
8. Edelweiss Large Cap Fund with an AUM of around Rs 550 crore is the 8th best large cap fund in our analysis with 16.7 percent and 19 percent CAGR returns in the last one-year and three-year respectively. The fund also scores relatively high on quality parameters like Sharpe Ratio, Sortino Ratio and Beta.
9. Canara Robeco Bluechip Equity is at the 9th spot in our ranking with 13.2 percent and 17.4 percent CAGR returns in the last one-year and three years respectively. The fund with an AUM of nearly Rs 13,400 crore also has one of lowest beta in the category indicating low volatility of its returns.
10. Kotak Bluechip Fund is the last fund in our analysis with 13.8 percent and 18.5 percent CAGR returns in the last one-year and three years respectively. With an AUM of around Rs 6400 crore, the fund scores high on the Sharpe Ratio and Sortino Ratio though its beta is relatively high in the category.
(Disclaimer: This article is for information purposes only. Readers are advised to consult a certified financial advisor before making an investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).