HDFC Large & Mid Cap Fund: Targeting Growth With High Quality Businesses

HDFC Large & Mid Cap Fund is a popular Large & Midcap Fund that has been around for many decades during which it has experienced both highs and lows. Recently, it has grown significantly by investing in high-conviction stocks. The fund provides a mix of large and mid-sized companies and targets high-quality businesses with a long-term investment strategy.

HDFC Large & Mid Cap Fund, formerly known as HDFC Large Cap Fund, is one of India's oldest equity schemes launched in February 1994. Despite having a track record of over three decades, the fund's past performance may not be comparable to its current strategy. Originally, it focused on large-cap stocks, investing over 90% of its assets in the segment. However, after SEBI introduced the categorisation norms in 2018, the fund shifted to its current strategy, investing in both large-cap and mid-cap stocks, with some allocation to small-cap stocks. HDFC Large & Mid Cap Fund now focuses on fundamentally strong stocks with long-term growth potential, avoiding momentum-driven stocks and leaning slightly towards value investing.

A few years ago, the performance of HDFC Large & Midcap Fund was mediocre, often lagging behind its benchmark and peers. Because of this, it didn't attract much attention from investors. However, in the latter half of 2020, the fund's performance improved significantly amid a broad-based market rally. It now stands strong among the top performers in the Large & Mid Cap Fund category. The fund's impressive recent growth has brought it into the spotlight and its corpus has nearly tripled to Rs 23,484 crore in the past two years. This success is credited to its current fund manager Mr Gopal Agarwal who took charge of the fund in July 2020.

Over the last five years, HDFC Large & Mid Cap Fund has registered growth at a CAGR of 24.6%, outperforming the Nifty LargeMidcap 250 - TRI index, which grew at 23%. An investment of Rs 10,000 in HDFC Large & Mid Cap Fund five years ago would have now appreciated to Rs 30,098, compared to Rs 28,219 if invested simultaneously in the benchmark index.

Historically, HDFC Large & Mid Cap Fund has seen a change in its investment strategy (shifting from large-cap to large & mid-cap) as well as instability in the fund management team, which negatively impacted its long-term performance track record. However, in the past couple of years, the fund has made a strong comeback. Over the past 1-year, 2-year, and 3-year periods, it has outperformed the benchmark Nifty LargeMidcap 250 - TRI as well as the category average by around 3 to 4.5 percentage points on a rolling return basis. The recent superior performance has boosted its long-term performance numbers as well. Over the longer 5-year and 7-year periods, HDFC Large & Mid Cap Fund now shows better performance compared to many of its peers and has exhibited reasonable growth against the benchmark index.

The fund has managed risks well with a standard deviation of 14.99% (annualised), which is competitive with its benchmark and the category average. Additionally, HDFC Large & Mid Cap Fund has significantly outperformed its benchmark and category average in risk-adjusted returns, as shown by the Sharpe ratios.

What is the investment strategy of HDFC Large & Mid Cap Fund?

Under its current investment mandate since 2018, HDFC Large & Mid Cap Fund invests 35-65% of its total assets in large caps (top 100 companies) along with 35-65% in mid caps (companies ranking 101st to 250th). The fund aims to identify and invest in a diversified portfolio of strong growth companies based on the prevailing market environment. It also seeks to capture opportunities across value and turnaround companies.

While picking stocks, HDFC Large & Mid Cap Fund emphasises on companies which:

- are likely to achieve above-average growth

- enjoy distinct competitive advantages - have superior financial strength

- are trading at relatively attractive valuations, and/or

- have value unlocking potential

The fund follows a mix of 'top-down' and 'bottom-up' strategies for theme and stock selection. HDFC Large & Mid Cap Fund holds a large portfolio of over 150 stocks which can be attributed to higher allocation to mid and small-caps and a steadily rising asset size. It prefers to stay invested in each of its holdings with a long-term view to derive its full potential. Following a buy-and-hold investment strategy, the fund manager avoids unnecessary portfolio changes and refrains from chasing momentum. Moreover, the fund is cautious in its approach, which helps it to perform well even during uncertain market phases. HDFC Large & Mid Cap Fund usually remains fully invested across market cycles, taking very limited cash calls.

Amid a sharp rise in its AUM over the past couple of years, HDFC Large & Mid Cap Fund now holds a large-sized portfolio of around 150-200 stocks, compared to the 60-80 stocks held by its peers. As of November 30, 2024, the fund held 200 stocks in the portfolio with the top 10 stocks accounting for 22.6% of its assets. Notably, 5 out of the fund's top 10 stocks belong to the Banking sector. HDFC Large & Mid Cap Fund has a long tail of around 175 stocks having an allocation of less than 1% in each. These stocks collectively account for nearly 56% of its assets. Its strategy revolves around a long-term perspective for the majority of its stock holdings, with a portfolio turnover typically below 10%. This reflects the strong conviction the fund manager has in his stock picks.

In the last two years, HDFC Large & Mid Cap Fund benefitted the most from its holdings in Trent, Bharat Electronics, The Indian Hotels Company, Lupin, NTPC, and Max Healthcare Institute which contributed about 17% to its absolute gains. Hindustan Aeronautics, ICICI Bank, Prestige Estates Projects, Titagarh Railsystems, Shriram Finance, and L&T were among the other major contributors to its gains. The fund also benefitted from its holdings in L&T, Bharti Airtel, SBI, Jindal Steel and Power, Tata Motors, Solar Industries India, Power Finance Corporation, and Bharat Petroleum, among many others.

HDFC Large & Mid Cap Fund avoids actively rotating sectoral calls. It usually holds higher exposure to Banking & Finance, currently forming about 31.2% of its assets, followed by Infotech, Pharma, Auto & Auto Ancillaries, Engineering, and Consumption. Collectively these top sectors presently account for 70% of its assets. It also holds exposure to Healthcare, Power, Petroleum, Consumer Durables, Oil & Gas, and Telecom having allocation in the range of 2-3%. Although the portfolio is skewed towards cyclical, it maintains a reasonable level of diversification across defensive and sensitive sectors as well.

Is HDFC Large & Mid Cap Fund suitable for my investment goals and risk tolerance?

During the broad-based market rally seen since 2020 onwards, HDFC Large & Mid Cap Fund has registered robust growth with its large & mid-cap orientation that has helped it mark a noteworthy performance track record across short to long-term time frames. The fund now ranks among the toppers in its category. Its strategy of investing in high-conviction growth-oriented stocks at reasonable prices has helped it stand out.

HDFC Large & Mid Cap Fund avoids taking concentrated bets in specific stocks and sectors and aims to create a diverse portfolio. It emphasises risk management through diversification to offset the impact of higher volatility associated with mid and small-cap stocks, limiting exposure in each mid and small-cap stock to under 2% of the portfolio. Moreover, the fund focuses on a 'buy-and-hold' investment approach to derive the full potential of the stock/sectoral holdings in the portfolio. This approach helps the fund reduce risk during uncertain or bearish market phases, aiding long-term outperformance.

HDFC Large & Mid Cap Fund is suitable for investors looking for a well-diversified and growth-oriented Large & Mid Cap Fund with an investment horizon of at least 5 years.

Watch this video to find out the highest return Large & Midcap Fund SIPs:

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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