Nifty has shown a one-way movement gaining nearly 66% in the last one year. Typically, the Nifty is driven by large-cap heavyweights and that should have been positive for large-cap stocks. Let us look at how the large cap funds performed over the last one year compared to the benchmarks.
How large cap funds stacked up on returns?
The table below captures the returns earned by large-cap funds in India over the last one year. We have considered the returns on regular funds vis-à-vis the benchmark. Remember, most benchmarks may not use the Nifty or Sensex and may instead prefer a broad-based index like the Nifty 100 or the Nifty 200 or even the Nifty 500. The only requirement SEBI has is that benchmarks should be reflective and consistent to enable comparisons.
|Scheme Name||Return 1 Year (%) Regular||Return 1 Year (%) Benchmark||Excess Return (%)||Daily AUM (Crore)|
|Franklin India Blue-chip Fund||91.53||87.75||3.78||5,892.21|
|SBI Blue-chip Fund||89.04||89.63||-0.59||26,495.62|
|Kotak Blue-chip Fund||86.95||88.33||-1.38||2,296.47|
|Aditya Birla Frontline Equity||84.99||88.33||-3.34||19,296.73|
|ICICI Prudential Blue-chip||83.75||87.75||-4.00||26,377.32|
|Mirae Asset Large Cap Fund||83.31||87.75||-4.44||23,920.17|
|HDFC Top 100 Fund||83.10||87.75||-4.65||18,577.54|
|UTI Mastershare Fund||79.90||89.63||-9.73||7,606.24|
|Nippon India Large Cap Fund||78.87||89.63||-10.76||9,953.60|
|DSP Top 100 Equity Fund||76.67||89.63||-12.97||2,604.32|
|Canara Robeco Blue-chip||75.95||89.63||-13.68||2,072.10|
|BNP Paribas Large Cap Fund||67.98||88.33||-20.35||1,016.85|
|Axis Blue-chip Fund||59.35||88.33||-28.97||24,607.51|
While there 29 large-cap funds in India, we have only considered the funds with an AUM of over Rs1,000cr. If you think that the above 1-year returns look attractive, you must also compare with the benchmark and see if the fund has given excess returns. Interestingly, out of 29 funds, only 1 fund i.e., Franklin India Blue-chip has outperformed the benchmark while SBI Blue-chip has performed at par with the benchmark index. The remaining 27 funds underperformed the benchmark indices.
Large-cap funds also saw heavy outflows in FY21
If performance was one issue, the other big issue was flows and the large-cap fund saw net outflows for most part of the last one year. Check the cumulative flows chart.
The positive flows peaked in the month of May 2020. Since May, investors have net redeemed funds from large cap funds on a consistent basis each month taking out Rs14,267cr over the next 9 months. As a result, the large cap funds category ended with overall net outflows of Rs9,260cr over last 1 year.
Consistent outflows can be a double-edged sword for mutual funds. On the one hand it forces the fund to keep more liquidity than required and that puts pressure on returns. Secondly, funds are required to consistently churn their top performers to keep pace with redemption pressures. That is why, the AUM of large-cap funds at Rs176,000cr as of Feb-21 may look impressive but is misleading. Most of the AUM in last 1 year has come purely from stock appreciation. These outflows kept performance of large-cap funds under pressure.
Kurtosis was another trigger for large caps funds’ performance
Kurtosis may look like a sophisticated statistical term, but it is actually quite fundamental. For example, in the last one year, the performance of the Nifty and Sensex has been driven by a handful of stocks. Stocks like Reliance, HDFC Bank, HDFC, Infosys, TCS, Bharti Airtel and ICICI Bank were the big stars of the last one year. However, the large cap fund cannot create a portfolio of just 7 stocks. There are two reasons for the same and that is what kurtosis is all about.
Firstly, a large cap fund is expected to hold a diversified portfolio. That diversification comes at the cost of returns on a concentrated portfolio. Secondly, SEBI regulations prevent any fund from having more than 10% exposure to a single stock. That substantially limits the manoeuvring room for the funds. Since the Nifty returns are being driven by just a handful of stocks, this dichotomy in returns tends to make the large cap funds look like under-performers.
A final word of caution! One year is too short a time to evaluate mutual funds and you should ideally use a minimum time frame of 5 years. If the fund is able to deliver above 12-13% returns compounded over 5 years without undue risk, you are on track to create wealth. At the end of the day, that is what really matters!