Large-cap, low-volatility funds to dominate new offerings by mutual funds

Quality-focused funds also gain traction amid shift in market trends

The pace of new fund offerings (NFOs) by mutual funds (MFs) has mostly remained unaffected by the equity market turmoil but the choice of theme or strategy is undergoing a change, reflecting changing market dynamics.

 

Since the start of February, fund houses have sought approvals from the Securities and Exchange Board of India (Sebi) for 44 scheme launches, including 13 debt funds and 27 equity funds.

 

Majority of these equity funds follow strategies -- largecap, quality and low volatility -- that were out of favour with investors in recent years.

 

The upcoming launches are in contrast to the trend seen in previous months when sectoral, thematic and momentum-based funds dominated the equity NFO list.

 

Among the upcoming offerings are several passive funds tracking indices such as Nifty 200 Quality 30, Nifty Top 10/15/20 Equal Weight, Nifty 500 Low Volatility 50, Nifty 100 Low Volatility 30 and BSE Low Volatility.

 

While some of these schemes have already debuted, others are expected in the coming weeks.

 

The shift aligns with fund managers’ cautious outlook. Large-cap stocks, particularly mega-caps, are now seen as more reasonably valued compared to their mid- and small-cap counterparts. Additionally, expectations of a revival in foreign portfolio investor (FPI) flows have bolstered confidence in large-caps.

 

“Valuations have cooled-off in the last few months, although still remains high. We prefer large-caps over mid and smallcap schemes due to reasonable valuations plus possibility of FPIs making a comeback which may result in outperformance,” ICICI Prudential MF said in a report earlier this month. 

 

Offerings planned or recently launched in the largecap space are focused on the top 10 to top 20 stocks and follow an equal-weight strategy, wherein the corpus is equally invested into the constituent stocks.

 

The other popular strategy right now is low volatility. This strategy aims to reduce the impact of market volatility by investing in stocks that show lower price fluctuations. They work by selecting stocks based on their low volatility scores, often using the standard deviation of daily price returns over a specific period.

 

In the 3-month period, low volatility indices are flat compared to around 15 per cent decline in momentum indices.

 

Quality as a factor is also expected to make a comeback after underperforming value strategy for the past few years.

 

Overall, the strong momentum in the NFO space, which took launches in 2024 to a record high, has remained largely intact. The previous calendar year was a record year for NFOs, with launches exceeding 200 for the first time, even as debt fund launches declined. NFOs in the equity space, including active funds and index funds, numbered more than 150, according to data from Morningstar India.

 

The fund launch spree was one of the major factors behind record investment account additions in 2024 and inflows into equity funds. These launches were mostly in popular sectors and themes, with a sizable portion being first-of-their-kind industry offerings, such as those tracking capital markets, tourism, real estate, electric vehicles, new-age automotive, and other sectoral indices.

 

Sectoral and thematic funds were in high demand in 2024. Active funds in this category saw the highest inflows and added the most number of folios last year. The NFO tally in the active thematic space alone was 40.