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A majority of large-cap-focused equity mutual fund (MF) schemes have underperformed the benchmark Sensex over the past year despite the record-setting market rally. Of 35 such schemes, only 9 have managed to generate alpha — a term used to describe a fund manager’s ability to beat the market.
So, what weighed on the performance of large-cap funds? The underperformance of the financial pack. Traditionally, most schemes in the large-cap space have been overweight on financial stocks. The BSE Finance has severely unperformed the Sensex with returns of just 11.2 per cent in the past year.
“Over the past year, one can see that financials — which form a large part of the index — have not done well. Apart from that, sectors like commodities and IT, and some names in individual sectors which were laggards in the last two-three years, were top performers in the last year. So, being overweight on financials and underweight on some of the sectors which have done well could have led to weak performance,” said Shreyash Devalkar, senior fund manager-equity, Axis MF.
Financial stocks account for nearly 44 per cent of the Sensex. The technology and energy stocks have the second and the third biggest weighting, but that’s nowhere close to financials.
If one analyses one-year returns for top 100 stocks — the investable universe for large-cap schemes — not one financial stock features in the top 40. HDFC Bank with a one-year return of 25.5 per cent ranks 46th in terms of one-year returns among the BSE 100. The list of top performers is dominated by stocks, such as Adani Green, Tata Motors, and Cipla.
MF exposure to Adani Green, which has risen nearly 6x in the past year, has been negligible. It’s the same with Adani Ports, which has rallied 79 per cent.
One year is a short period to judge the performance of any mutual fund scheme. However, several large-cap schemes have struggled to generate alpha even on a longer horizon, such as three years or five years, the data shows.
As a result, financial planners have been advising investors to move towards low-cost exchange-traded funds (ETFs) or index funds, which mimic returns of the benchmark.
“If investors have exposure in diversified funds and invested in the flexi-cap category, they can skip investing in large-cap funds. This is because flexi-cap offers sufficient large-cap exposure. Second, if you are conservative investors — there are enough options in the passive space to ride the large-cap category,” said Vidya Bala, co-founder of PrimeInvestor.
Industry participants say active fund managers can deliver better returns during a volatile period.
“Index funds and ETFs have managed to give better returns in the last one year, but when the markets are unstable for a long period, active funds will deliver better returns than passive funds. We also believe that when the Indian economy recovers, the financial sector will do well and active funds, which have large positions, are likely to do well,” said the CEO of the mid-size AMC.
The data from Value Research shows that DSP Top 100 Equity and JM Core 11 have fared the poorest with returns of just 8.6 per cent and 4.3 per cent, respectively, in the last one year. Among the best-performing schemes have been Quant Focused Fund and Franklin India Bluechip with one-year return of 32 per cent and 26 per cent, respectively.
