Weekly Musings – NFO Pick (Bajaj Finserv Large Cap Fund)

29 Jul 2024 , 11:59 AM

HOW ARE LARGE CAPS DEFINED IN INDIA?

For a long time, the definition of large caps, mid-caps and small caps were left to the best judgement of the fund managers and the definition was more fluid and less rigid. However, with the growing AUM of mutual funds, the SEBI has put out a clear model for classifying large caps, mid-caps, and small cap stocks in India. Based on the model, here are some interesting factors about large cap stocks in India.

• Listed Indian companies are ranked descending on market cap and the top 100 classify as large cap stocks in India. While the market cap definition is fluid, at the current juncture, the large cap space starts from a market cap of ₹84,000 Crore and goes all the way up to ₹19,00,000 Crore.
• Most of the front line stocks in the large cap space are market leaders in their respective business. You can just quickly enumerate them. HDFC Bank in banking, TCS and Infosys in IT / software, Reliance Industries in oil & gas, Bharti Airtel in telecom, Larsen & Toubro in capital goods etc. Essentially, these companies have strong leadership positions.
• Large cap stocks are extensively tracked by analysts. For instance, if you look at stocks like TCS, Infosys, SBI, Reliance, HDFC Bank etc, there are scores of analysts on the buy side and the sell side; as also at domestic brokerage and international brokerages. This extensive tracking and traction is a key point in large cap stocks.
• Institutional ownership is another stand out feature of these large cap stocks. Most of these stocks are extensively owned by foreign portfolio investors (FPIs), mutual funds, insurance companies and sovereign funds. This not only brings stability to the large caps, but also makes them more accountable and better on corporate governance.

Let us now turn to why investors must look at large cap funds in India.

THE CASE FOR INVESTING IN LARGE CAP FUNDS

There are several strong reasons to be investing in large cap funds. Here are a few such compelling reasons.

• The Nifty 50 companies literally dominate India Inc in terms of financial performance. The top 50 companies account for 52% of the net sales of the Nifty 500, 50% of the EBITDA and 44% of the net profits. Clearly, when you buy large caps, you are buying the financially dominant players in the market.
• India has only 3 companies in the global top 100, while, the US has 60 companies and China has 11 companies. India will surely grow its market cap heft as it approaches the $5 Trillion market cap mark. For instance, in India, there are only 5 companies with market cap over $100 Billion. In the US, Top 6 companies have a market cap of over $1 Trillion with the top three having market cap of over $3 Trillion. There is big room for India to grow.
• Recently, the Nifty 50 TRI reached record levels of 35,000 in a record time of just 204 days. The intervals for the Nifty 50 TRI to travers every 5,000 points has been consistently reducing. An investment of ₹1 Crore in the Nifty 100 TRI in 2003 would be worth ₹33.83 Crore today.
• Once the large cap portfolio is held for more than 5 years, the probability of negative returns almost becomes zero. Also, the large caps see much lower drawdowns compared to mid-caps and small caps in falling markets. As of March 2024, the liquidity risk in large cap stocks is one-fourth of mid-caps and one-twelfth of small caps.
• In summary, a diversified large cap portfolio has been able to consistently deliver higher risk adjusted returns, with lower liquidity risk, greater resilience in volatile markets and lower risk of drawdowns in falling markets.

Let us now turn to how the large cap funds as a category have performed.

PERFORMANCE OF LARGE CAP FUNDS IN INDIA

Here is a quick look at how the Large Cap Funds in India have performed over 1-year, 3-Year and 5-Year periods. Large cap funds are those that invest predominantly in large cap stocks (defined by SEBI as the top 100 stocks by market cap). Effectively, this is a short term, medium term, and a long-term view, although the table below is ranked on 5-year returns to give a fair picture. Anything beyond 1 year, the returns are on a CAGR basis. In all cases, we considered Direct Plans, to avoid impact of fund costs. Here are the 30 large cap funds in India managing a total corpus of ₹3,54,089 Crore. These are generic funds investing in the biggest and most reputed companies in India.

Scheme Name	Return (%) 1-Year	Return (%) 3-Years	Return (%) 5-Years	Daily AUM (₹ in Crore)
Nippon India Large Cap Fund	39.62	26.67	22.25	30,880.12
Baroda BNP Paribas Large Cap Fund	43.00	21.98	21.89	2,225.83
ICICI Prudential Bluechip Fund	39.48	23.00	21.73	61,172.00
Canara Robeco Bluechip Equity Fund	33.58	18.37	21.72	14,455.30
Kotak Bluechip Fund	36.15	19.13	21.45	9,223.57
JM Large Cap Fund	47.86	23.71	21.43	310.86
Edelweiss Large Cap Fund	34.97	20.41	21.30	1,030.54
Invesco India Large Cap Fund	39.90	20.42	21.19	1,199.83
Mahindra Manulife Large Cap Fund	36.91	19.74	20.95	541.89
Bandhan Large Cap Fund	37.98	19.89	20.49	1,553.33
ABSL Frontline Equity Fund	34.46	19.39	19.62	29,581.91
Tata Large Cap Fund	36.05	19.94	19.46	2,392.29
SBI Bluechip Fund	27.22	18.21	19.44	51,000.89
HDFC Top 100 Fund	35.98	22.97	19.43	36,780.71
UTI Large Cap Fund	30.44	16.50	19.20	13,371.63
DSP Top 100 Equity Fund	39.88	18.58	18.96	4,228.32
HSBC Large Cap Fund	35.04	18.53	18.94	1,950.38
LIC MF Large Cap Fund	31.86	16.89	18.63	1,546.38
Sundaram Large Cap Fund	28.75	17.92	18.52	3,569.23
Franklin India Bluechip Fund	32.16	15.40	18.46	8,130.80
Union Large Cap Fund	29.68	17.32	18.42	392.85
Mirae Asset Large Cap Fund	28.11	16.20	18.27	40,467.37
Groww Large Cap Fund	37.15	19.33	17.66	128.26
Taurus Large Cap Fund	43.41	18.77	17.55	51.45
Axis Bluechip Fund	28.87	13.17	16.89	34,451.66

Data Source: AMFI

The table above provides the performance of large cap funds in India, over 1-year, 3-Year and 5-Year time frame. There are a total of 30 large cap funds in India, but we have only ranked the top 25 in the table above. These have been ranked on 5-year CAGR returns to give a longer term perspective of the large cap fund category performance. Here is a sneak peek at the top performers.

• Let us first look at the returns on Large Cap Funds over a 1-year period. On a 1-year returns basis, these Large Cap Funds  generated maximum returns of 48.72% and minimum returns of 25.49%, which is fairly impressive in terms of low dispersion and attractive returns even in a worst-case scenario. The average returns over a 1 year period are 36.19%, which is very impressive. All the large cap funds in India have generated returns of over 25%, so had you selected a large cap fund, your probability of beating most other asset classes on returns was as high as 100%.
• Let us now turn to the returns on Large Cap Funds over a 3-year period. On a 3-year returns basis, these Large Cap Funds  generated maximum returns of 26.67% and minimum returns of 13.17%, which is once again impressive in terms of low dispersion and attractive returns even in a worst-case scenario. The average returns over a 3-year period are 19.15%, which is fairly impressive. Average returns of over 19% is, once again, very impressive considering that large caps have struggled to generate alpha.
• Let us finally focus on the returns on Large Cap Funds over a 5-year period. On a 5-year returns basis, these Large Cap Funds  generated maximum returns of 22.25% and minimum returns of 16.88%, which is fairly impressive in terms of low dispersion and attractive returns even in a worst-case scenario. The average returns over a 5-year period are 19.64%, which is very impressive since this is a proxy for the Nifty / Sensex and has done better than the benchmark indices.

Large cap theme was out of favour for some time due to the stellar show put up by mid-caps and small caps. However, the recent volatility around the election time and the budget period has been a reality check for the more volatile mid-cap and small cap stocks. Large caps are back in favour among investors and they have performance to boot. The Bajaj Finserv Large Cap Fund is positioned and timed to capitalize on that shift.

GLANCE AT THE BAJAJ FINSERV LARGE CAP FUND NFO

Here are some details of the Bajaj Finserv Large Cap Fund NFO you must know to decide on investing in the fund.

• The NFO of Bajaj Finserv Large Cap Fund opens for subscription on July 29, 2024 and will close on August 12, 2024. Being an open-ended generic large cap fund with focus on large cap stocks, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The Bajaj Finserv Large Cap Fund is best suited to investors looking for long-term capital appreciation through a focus on large cap blue chip companies, where the overall risk-reward equation if favourable. Large caps do score in terms of risk-adjusted returns.
• On the Standard SEBI Risk-O-Meter, the Bajaj Finserv Large Cap Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities (80% to 100%) that the Bajaj Finserv Large Cap Fund will have. In addition, there is also the risk of entering the large cap stocks at lifetime highs of the Nifty and the Sensex. Most large cap funds also have a kurtosis risk as they cannot fully focus on high performing stocks due to the 10% exposure limit to a single stock.
• The Bajaj Finserv Large Cap Fund is about generating capital appreciation from a smartly diversified portfolio of equity stocks in the large cap space. The focus will purely be on large cap companies that constitute part of the NSE 100 index, which means; a combination of Nifty 50 stocks and Nifty Next-50 stocks.
• Investors can invest in the NFO of Bajaj Finserv Large Cap Fund in minimum size of ₹500 lumpsum and in multiples of ₹1 thereof. Minimum additional purchases will be of ₹100. This also applies to switch-ins during the NFO. The fund also supports the systematic investment plans (SIPs) and systematic transfer plans (STPs) with the minimum allocation.
• While there is no entry load, there will be an exit load since this is a large cap fund with a longer term perspective. Hence, early exits may be detrimental to existing unit holders. There is an exit load on redemption and switch out on the fund to the tune of 1% of NAV, if redeemed within 6 months of the allotment date. Any redemption or switch out after 6 months will not attract any exit load. However, leaving aside the issue of exit loads; investors are advised to hold the fund for a minimum period of 5-7 years to get full benefits of the diversified large cap theme of Bajaj Finserv Large Cap Fund.
• The Bajaj Finserv Large Cap Fund does not give any guarantee on returns, being an equity oriented fund, and the performance is subject to the vagaries and vicissitudes of the markets in general and the stocks selected in particular. Being an active fund, the fund will also be subjected to the risk of fund manager discretion. The Bajaj Finserv Large Cap Fund will be benchmarked to the Nifty 100 Total Returns Index (TRI) and the fund managers will focus on generating alpha by beating this underlying index.
• The Bajaj Finserv Large Cap Fund will be managed by Nimesh Chandan. In addition, Sorbh Gupta will focus on the equity part while Siddharth Chaudhary will focus on the debt part. The intent of the fund management team will be generate alpha by earning returns on the fund that is better than the index returns. KFIN Technologies Ltd (formerly Karvy Computershare Ltd) will be the registrars to the issue. The intent of the fund is to generate long term capital appreciation by investing in a diversified portfolio of high quality large cap stocks.

The Bajaj Finserv Large Cap Fund NFO offers an opportunity for investors to participate in the relatively safety and security of large cap stocks. Large caps are not just stable, but also cheaper in valuation terms compared to mid-cap and small cap funds.

TAX TREATMENT FOR BAJAJ FINSERV LARGE CAP FUND

Post the Union Budget announced on July 23, 2024; there are some key changes to the way the returns earned on the Bajaj Finserv Large Cap Fund will be taxed. It must be remembered that, being an equity fund, it will be taxed at par with equities under the Income Tax Act. Here are the key things to know about tax treatment.

• Being an equity fund, the holding period criteria for short term and long term capital gains demarcation is 1 year. If the Bajaj Finserv Large Cap Fund is held for 1 year or more, it will qualify as long term capital gains. It will be short term capital gains if held for less than 1 year. It could also be capital losses for short term and long term.
• The dividends declared by the fund, if any, will be treated as other income in the hands of the investors and will be taxed at the peak incremental rates of tax applicable. In addition, if the dividends exceed ₹5,000 in a year, then they will be subject to TDS.
• Short term capital gains have under gone a change in the July 23, 2024 Union Budget announcement. The short term capital gains on the fund arising from units sold before 1 year of holding will be taxed at 20% of the gains. It was 15% prior to the Union budget, but has since been increased to widen the gap with long term capital gains rate.
• In addition, the long term capital gains (held for over 1 year), will now be taxed at a flat rate of 12.5% (increased from 10% prior to the budget). However, the threshold exemption limit has also been increased. While the limit was ₹1 Lakh exemption annually, that has been now raised to ₹1.25 Lakhs.

Understanding taxation of large cap mutual funds is important as it is the post-tax returns that really matter from a long term financial planning perspective.