Slew of corrections dent largecap funds' long-term return picture

Average 5-year performance hardly above fixed income returns

Equities may not always be the best asset class over the long term.

 

The case in point is largecap mutual fund schemes, the five-year performance of which has taken a toll. This is owing to the prolonged time correction post September 2024 and the recent sharp decline in largecap stocks.

 

The 5-year returns of most active largecap funds are currently less than 7.5 per cent (annualised). The average five-year return of 7.1 per cent is close to the interest rates offered by relatively low-risk fixed-income instruments such as bank fixed deposits.

 

Passive funds tracking largecap indices like Nifty50 and Nifty 100 have also delivered around 6.5 per cent compound annual growth rate (CAGR) returns. 

The equity market, especially largecap stocks, has remained under pressure for nearly two years as multiple headwinds have hit the market, often back-to-back and at times simultaneously. Sustained foreign portfolio investor (FPI) selling has been the biggest drag.

 

Overseas investors repeatedly pulled money out as high valuations, relatively-weak earnings growth and better opportunities in other markets weighed on their India allocations.

 

The selling pressure has intensified over the past eight weeks, with the market witnessing its longest losing streak in 25 years. This comes as elevated US bond yields, a sharp rise in crude oil prices and a weakening rupee further dented investor sentiment.

 

The subdued performance of largecap funds has widened the return gap with smallcap schemes.

 

In the 5-year timeframe, the average smallcap fund returns (14.6 per cent CAGR) is now more than double that of largecap funds (7.1 per cent).

 

Midcap schemes have also delivered significantly higher returns at 13.3 per cent CAGR.

 

The continued broader market outperformance has resulted in bulk of the active equity MF flows going into midcap and smallcap funds.

 

While smallcap funds have scaled new highs in the past two months to hit almost ₹8,000 crore in August, largecap funds have recorded over ₹1,000 crore outflows in July and August.

 

“Small and midcap (SMID) funds are now contributing 50–55 per cent of total active equity inflows, a level last seen in 2024,” Elara Capital said in a recent report based on August MF data.

 

“The simultaneous acceleration in SMID inflows and the shift away from largecaps suggests that domestic investors are not merely adding equity exposure but are increasingly repositioning within equities toward higher-beta segments that have outperformed,” it added.

 

Kotak Institutional Equities, in a September 29 report, said the FPI apathy for largecap stocks is understandable considering the risks to India’s macro from high oil prices and relatively low attractiveness. But it attributed the domestic flow trend to retail investors’ “utter fascination with quick returns, with past returns their investment lodestar.”

 

The brokerage firm expects largecap stocks to rebound as and when there is a resolution to the West Asia war.

 

“We hope for a quick resolution of the West Asia war, which could turn despair into hope for largecaps. Otherwise, euphoria may give way to despair for SMIDs too,” it stated.