Image by Gerd Altmann from Pixabay
However, since picking individual stocks can be difficult and risky, investors looking to benefit from the expected improvement in market breadth can opt to invest in large & mid cap funds.
What are Large & Midcap Funds?
Large & Midcap Funds are equity-oriented funds that are mandated to invest minimum 35% of its assets each in equity and equity related instruments of large-caps and mid-caps.
While large-caps are known to provide stability across market cycles, their potential to generate very high returns is limited. On the other hand, mid-caps can outpace large cap returns over the long run though they can be highly volatile in the short term.
By investing in large & midcap funds, you can benefit from the steady returns capability of large-caps and high growth potential of mid-caps, at a reasonable degree of risk, provided you select the best funds in the category.
If you have the capability of bearing the impact of short-term volatility, you can consider adding large & mid cap fund to your portfolio for your long term goals.
Graph: Placement of large & mid cap funds on risk-return spectrum
Note: For illustrative purpose only
(Source: PersonalFN Research)
On risk-return parameters, large & midcap funds are placed just above large-cap funds. This means large & mid cap funds can offer better returns than large-caps though at a slightly higher risk.
If you have a high risk appetite and longer investment horizon, large & mid cap fund can be a suitable bet. Large & Mid-cap-Funds can form a part of your core equity mutual fund portfolio.
Table: Performance of large & mid cap funds over a period of time
Data as on December 13, 2019
(Source: ACE MF)
*Please note, this table only represents the best performing Large and Mid Cap Funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.
The top performing funds in the category across time period have clearly outpaced the benchmark. Over the longer time horizon of 5-year, numerous schemes generated double-digit returns as compared to single digit returns registered by the benchmark.
However, some funds performed poorly throughout, which brought down the average category returns nearly in line with the benchmark.
Some of the best performing large & midcap schemes during this period according to the unbiased research and analysis at PersonalFN are Mirae Asset Emerging Bluechip Fund, Canara Robeco Emerging Equities Fund, IDFC Core Equity Fund, Invesco India Growth Opportunities Fund, Sundaram Large and Mid Cap Fund, Kotak Equity Opportunities Fund, and SBI Large & Mid Cap Fund. These schemes have rewarded investors in the past with superior risk-adjusted returns.
The other decent performers are:
While picking funds in the large & midcap category, remember that some schemes are large-cap oriented while others are mid-cap oriented. Therefore, it is important to assess your risk profile before selecting among the top funds in the large & midcap category. Also, note that the past superior performance of some schemes may not sustain in the future.
Here are the other facets you need to look into to select the best Large & midcap funds:
Image by Gerd Altmann from Pixabay
Quantitative Parameters:
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Performance and risk analysis
Analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns.
Under this, you need to rank the fund based on quantitative parameters like rolling returns across short-term and long-term periods, such as a 1-year, 3-year, and 5-year timeframe, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.
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Performance across market cycles
You need to ensure that the fund has the ability to perform consistently well across multiple market cycles. Therefore, compare the performance of all the available Large and Mid cap funds vis-a-vis their benchmark index as well as category peers across bull phases and bear market phases.
A fund that performs well on both sides of the market should rank higher on the list.
Qualitative Parameters
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Portfolio Quality
Adequate Diversification - The scheme should not hold a highly concentrated portfolio. It should have a well-diversified portfolio and the exposure to the top-10 holdings should be ideally under 50% while concentration to one particular sector should not exceed 30-35%.
Low Churn - Engaging in high churning can result in higher cost impacting the overall return of the scheme. Therefore, you also need to consider the portfolio turnover ratio and expenses, and penalise funds involved in high churning, i.e. those funds with a turnover ratio of more than 100%.
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Quality of Fund Management
You must consider the fund manager's experience, workload, and the consistency of the fund house. Therefore, assess the following criteria:
The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade.
The number of schemes managed - A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is burdened with managing a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.
The efficiency of the fund house in managing your money - Research about the fund house's performance across schemes; find out if only a few selected schemes are doing well. A fund house that performs well across the board is an indication of sound investment processes and risk management techniques in place.
Yes, we know that the above list is a lot for an average investor to look at. It involves a lot of number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance.
Watch this short video on selecting mutual fund schemes:
At PersonalFN, we select and recommend mutual funds on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:
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S - Systems and Processes
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M - Market Cycle Performance
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A - Asset Management Style
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R - Risk-Reward Ratios
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T - Performance Track Record
The outlook for large & midcap funds in 2020:
Mid-caps have been under pressure for the last two years due to the prolonged economic slowdown. This has led to a sharp correction in its valuations from its peak in mid-2018. Thus, the valuations in the mid-cap segment seem to be more attractive compared to their large-cap counterparts.
Graph: Valuations in mid cap provides comfort
Data as on December 13, 2019
(Source: nseindia.com)
The reform measures announced by the government to boost consumption and improve corporate earnings growth will likely benefit the economy. As a result, quality mid-cap stocks will be in a better position to reward mutual fund investors with better risk-adjusted returns when the tide turns in favour of the segment.
In terms of large-caps, the valuation has reached a very high level due to strong rally in some of the frontline stocks. This could limit the future growth potential of these stocks.
On the other hand, some of the large-cap stocks especially in the auto and mining & metal segment were beaten down. This implies that even large-caps are not immune to economic downturn.
As the economy recovers, these stocks could see the upside again and mutual fund managers could benefit from picking some of these stocks available at lower valuations and scaling down exposure to some of the overvalued stocks.
Therefore, investing in worthy large & mid cap funds in 2020 makes a lot of sense.
Before investing in any scheme make sure to clearly define your financial goals, time horizon, and assess your risk profile. Invest in schemes that align with your set investment objective and personalised asset allocation plan. Review your investment at regular intervals to ensure you're on the right track to accomplish your envisioned financial goals.
Editor's Note: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.
PersonalFN's mutual fund recommendations tend to beat the market by a significant margin over long time periods. FundSelect has beaten the market by over 70% in a decade.
Each fund recommended under FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.
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Author: Divya Grover