Tide turns for active large-cap funds, majority outperform benchmarks

In a reversal of trends this year, active large-cap funds have outperformed their benchmark much better than mid- and small-cap funds as markets soared. In contrast, in the market rally of the past 3-4 years post-Covid, mid- and small-cap funds have generally marched ahead of their benchmarks, while large-caps generally remained underperformers vis-à-vis bluechip indices.

Although one year is not a long-enough period to judge performance, in a raging bull market such as the present one, it may be a good idea to take stock of how funds fared.

Beating benchmarks

In the last one year (as of December 14), as many as 26 of the 30 (or 87 per cent) active large-cap funds outperformed the Nifty 100 TRI returns of 14.5 per cent over this period. The category average return was 18.7 per cent.

The mid- and small-cap fund categories, which tend to outperform benchmarks easily, have lagged. In the last one year, only five of the 29 mid-cap funds (17 per cent) and nine of 24 small-cap schemes (37.5 per cent) outperformed the Nifty Midcap 150 TRI and the Nifty Small Cap 250 TRI, respectively.

Large-cap funds managed this outperformance by smartly adjusting stock and sector weights vis-à-vis the Nifty 100 – mostly avoiding the underperformers.

For example, information technology, oil, gas & consumable fuels and FMCG were relative underperformers in the last one year and funds had much lower weights on these sectors than the benchmark.

Though banks and finance companies carried heavy weightage in large-cap funds, the choice of stocks and weightages resulted in delivering outperformance. So, lower holdings in HDFC Bank and Kotak Mahindra Bank and higher weightage to ICICI Bank and Axis Bank helped.

Again, going light on Reliance Industries, but taking higher bets on Larsen & Toubro as well as many PSU (public sector undertakings) such as NTPC helped in generating higher returns.

Restoring allocations

Notwithstanding the relative underperformance of mid- and small-cap funds, absolute returns have been quite high. It is quite likely that the proportion of mid- and small-cap stocks in your portfolio is much higher than your original intended asset allocation pattern. For example, a 70:30 large to mid-small cap equity allocation pattern choice may have become 50:50 or 60:40 in the last one year depending on your holdings.

Given that large-caps have started showing signs of recovery, it may be time to reallocate your investments. This can be done by increasing large-cap allocation and reducing weightages of mid- and small-cap stocks so that balance is restored. FIIs coming back may also favour rally in large-caps.

Of course, one year point-to-point returns may not suffice to make a judgement on the revival in active large-cap funds. Individual funds must be analysed for rolling returns, risk ratios and consistency in beating benchmarks before adding them to your portfolio. The fund reviews in bl.portfolio every week can help you make an informed choice.

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