Mutual funds have been gaining popularity with small investors as they they hold the promise to offer more returns than other asset classes including land, are more tax efficient and provide easy entry and exit route. Selecting an appropriate mutual fund scheme poses challenges to a common investor as there are myriad schemes to choose from. Further there is considerable miss selling in the mutual fund industry driven by interest of institutions, large distribution houses, and many time distributors who may be primarily driven by consideration of commissions.
Bench marking Changes: An Important Step
Many Mutual Funds had long been claiming that their funds were able to outperform returns from market as measured by performance of benchmark Indices. These indices were not truly reflective of returns from market as they took into account capital appreciation only and did not account for dividends etc. Thus to correct this anomaly, from February 1, 2018 SEBI the watchdog for Indian Mutual Fund Industry mandated that all fund houses will have to benchmark their equity and balanced funds to Total Returns Index (TRI) instead of then prevailing practice of bench marking against Price Return Index (PRI). Total Returns variant of an Index (TRI) in addition to capital gains, also takes into account all dividends/ interest payments that are generated from the basket of constituents that make up the index . Hence TRI is more appropriates as a benchmark to compare the performance of mutual fund scheme.
Now investors can judge extra return if any ( Alpha ) generated by the fund manager with respect to TRI adjusted Benchmarks. Alpha is a measure of the value added by the fund manager, for the same amount of risk. Needless to say that number of fund houses which were claiming to have outperformed benchmarks, will now fall drastically after making a comparison with the TRI instead of the PRI (normal indices).
Categorisation of Mutal Funds
SEBI had introduced categorization of open-end mutual funds to ensure uniformity in characteristics of similar type of schemes launched by different mutual funds. This will help investors to evaluate the different options available to them before making informed decision to invest. Large- cap funds invest in stocks of large, liquid, blue-chip companies with stable performance and returns. Large Cap refers to 100 top companies in terms of market capitalization on the stock exchanges. A Large Cap Fund is an open ended equity scheme predominantly investing in large cap stocks. The minimum investment in equity and equity related instruments of large cap companies shall be 80 percent of total assets.
Large Cap Funds: Suitability to Investors
- Investors first need to set their investment objectives and risk tolerance level . For investors having a lower risk tolerance level, the Mutual fund portfolio should be biased in favor of large cap funds.
- Large cap schemes are suitable for conservative equity investors.
- The Funds are recommended for a longer investment horizon typically extending over few years to achieve long-term financial goals.
- Large Cap companies are generally leaders in their field of business and are more stable than smaller or mid- sized companies. This is more true during volatile market conditions.
- The Large Cap companies tend have a strong performance record and are backed by well laid and robust corporate governance practices.
Top Large cap Mutual Funds by AUM
There are 8 large cap Mutual Funds with AUM > 1000 crore. The expense ratio and other data provided pertain to Direct growth option of these large cap funds.
| Fund ( 21-12-18) | AUM (cr) | Exp ratio | Benchmark |
| ABSL Frontline Equity | 20,884 | 1.17% | nifty50tri |
| SBI Blue Chip | 20287 | 1.32% | bse100tri |
| ICICI Pru Bluechip | 18,870 | 1.21% | nifty100tri |
| Reliance Large Cap | 11410 | 1.26% | bse100tri |
| HDFC Top 100 Fund | 7723 | 1.19% | nifty100tri |
| Franklin India Bluechip | 7,508 | 1.33% | nifty50tri |
| Axis Blue Chip | 3,295 | 0.90% | nifty100tri |
| Kotak Blue Chip | 1,346 | 1.15% | nifty50tri |
Axis Mutual Fund is having the lowest Expense ratio.
Large Cap Mutual Fund Performance vs Benchmarks
| As on 21-12-18 | |||||
| Particulars | Ret 6m | Ret 1y | Ret 3y | Ret 5y | |
| Benchmarks | |||||
| NIFTY 50 TRI | 0.75% | 4.46% | 12.61% | 12.76% | |
| NIFTY 100 TRI | 0.34% | 2.50% | 12.84% | 13.70% | |
| BSE 100 TRI | 0.85% | 2.45% | 13.00% | 13.49% | |
| Mutual Funds | bench mark | ||||
| ABSL Frontline Eq | -2.27% | -2.34% | 12.01% | 15.79% | nifty50tri |
| SBI Blue Chip | -2.27% | -3.37% | 10.84% | 16.93% | bse100tri |
| ICICI Pru Bluechip | 1.43% | 2.50% | 12.84% | 13.70% | nifty100tri |
| Reliance Large Cap | 3.53% | 0.26% | 13.42% | 18.27% | bse100tri |
| HDFC Top 100 | 4.09 | 0.09% | 13.41% | 15.21% | nifty100tri |
| Axis Blue Chip | 0.52% | 8.04% | 14.20% | 15.94% | nifty50tri |
| Franklin Ind Bluechip | -1.18% | -2.65% | 10.13% | 13.67% | nifty100tri |
| Kotak Blue Chip | -1.00% | -1.69% | 10.55% | 15.07% | nifty50tri |
Large Cap Mutual Funds: Statistical Measures
There are many parameters that are used to measure the volatility in performance and risk adjusted performance of a fund. We here limit ourselves to two statistical indicators alpha and beta.
In simple terms , Alpha represent the value that a fund manager adds or subtracts from a fund portfolio’s return. An alpha of 1.0 means the fund has outperformed its benchmark by 1%. Similarly , an alpha of -1.0 would indicate an under performance by the fund by 1%.
Beta is a measure of the volatility, or the systematic risk of the fund portfolio with respect to the market in totality. A beta near to 1.0 indicates that the funds investment’s value will move in tandem with the market. A beta of less than 1.0 indicates that the funds NAV is less volatile than the market or benchmark. Correspondingly, a beta of more than 1.0 indicates that the funds NAV is more volatile than the market. A fund with beta of 1.3 is theoretically 30% more volatile than the market. Thus mutual fund schemes with a a higher alpha and lower beta are considered as better performers under this framework.
| Fund | Ret 3y | Alpha | Beta |
| ABSL Frontline Eq | 12.01% | -0.36 | 0.93 |
| SBI Blue Chip | 10.84% | -1.02 | 0.91 |
| ICICI Pru Bluechip | 12.84% | 0.68 | 0.92 |
| Reliance Large Cap | 13.42% | -0.04 | 1.03 |
| HDFC Top 100 | 13.41% | -0.66 | 1.12 |
| Axis Blue Chip | 14.20% | 1.56 | 0.92 |
| Kotak Blue Chip | 10.55% | -2.20 | 0.99 |
| Franklin India Bluechip | 10.13% | -2.63 | 0.92 |
Axis Blue chip Fund has a good alpha and a relatively lower volatility, followed by ICICI Pru Bluechip Fund.
Assessment
- SEBI re-categorization of mutual funds and making it mandatory for Large cap Funds to invest 80% in large cap companies may limit the Alpha ( Out performance) that the funds may have reported in the past when these funds enjoyed greater allocation flexibility.
- While the change of Benchmark does not in any way affect performance of funds, their performance will now look rather dull as the comparison is now with a Total Return Benchmark (TRI) than a simple benchmark
- As above analysis shows most of the large cap funds have not been able to match the performance of market in terms of their stated Benchmarks. This raises questions whether an investor can be better of by investing in an index fund or ETF which being passively managed has much lower expenses and offers much lower beta with respect to the benchmark.
- Compared to large cap funds, multi-cap and mid-cap funds categories, have much more flexibility to invest and therefore some of these funds at least have the potential to considerably outperform the benchmarks. However it can go the other way around as well.
- With re categorization and TRI based bench-marking in force, Large cap funds may loose some of their sheen and may attract investors with long term horizon and those with low risk appetite.
- Out of these large cap funds only Axis Blue chip fund has been able to show some consistency & has been generating higher returns vis a vis the benchmark,. It performance due to mandatory regulations may also be watched by investors to see if it is able to continue its out performance.