Weekly Musings – NFO Pick (HDFC Nifty LargeMidCap 250 Index Fund)

18 Sep 2024 , 12:06 PM

WHAT IS THE NIFTY LARGEMIDCAP 250 INDEX ALL ABOUT?

The Nifty LargeMidCap 250 Index is a combination of the 100 stocks of the Nifty 100 index and the 150 stocks of the Nifty 150 MidCap index. Essentially, this index has a 50% exposure to the large cap stocks and a 50% to the mid-cap stocks. In short the it will combine the large caps ranked 1 to 100 on market cap and the mid-caps ranked 101 to 250 on market cap. This will give a combination of market leaders and future market leaders. While the large caps would be stable with less volatility, the mid-caps would be more volatile. However, history is testimony that mid-caps have outperformed on returns in the past.

While most of the large cap companies are well-established business, the mid-caps are still growing and are yet to reach maturity stage. Some of the key sectors that are encompassed in large caps are financial services (BFSI, IT, and Auto while key sectors contained in the mid-caps are capital goods, healthcare, NBFCs and auto components. This Nifty LargeMidCap 250 index portfolio will have a 50% allocation to large caps and a 50% allocation to mid-caps. While the combination typically gives higher returns than the Nifty Large Caps, it has better management of risk compared to the mid-caps.

YOU CANNOT PREDICT WINNERS, BUT ALLOCATION STILL WORKS

The Nifty LargeMidCap 250 Index Fund brings two key advantages to the investors. Firstly, it obviates the need to predict winners or having to choose between large caps and mid-caps. There is an eclectic mix of both. Secondly, it does automatic asset allocation so the individual does not have to worry about actioning asset allocation or the tax implications of the same. That is done by the index fund itself. Here are some interesting takeaways on the combination of large caps and small caps in a single passive fund.

• It is hard to make a choice between large caps and mid-caps. In the last 20 years, the Nifty 100 TRI has outperformed in 8 years while the Nifty MidCap 150 TRI has outperformed in 12 years. Combining them through the Nifty LargeMidCap Index Fund gives a much better risk-reward ratio.
• The fund will maintain a 50% weight for large caps and mid-caps. However, there will also be a semi-annual review of the portfolio and weight rebalancing every 3 months. This ensures that the profit booking happens automatically at higher levels.
• The Nifty LargeMidCap 250 index averages the valuations of the large and mid-cap stocks. For instance, the Nifty LargeMidCap 250 index portfolio will have a P/E of 31.46X, Price to Book ratio of 4.94X and dividend yield of 0.93%. This is far more attractive than the valuations of a mid-cap index portfolio.
• Compared to the large cap Nifty 100 index, certain sectors tend to get underplayed in the Nifty LargeMidCap 250 index. For instance, BFSI comes down from 30.7% to 24.5%, IT comes down from 11.4% to 9.0%, and oil & gas comes down from 10.7% to 7.4%. At the same time, the weight of sectors like capital goods goes up from 2.1% to 8.8%, healthcare from 4.0% to 7.6%, and chemicals from 0.6% to 3.4%. This brings about a less skewed mixture of sectors in the Nifty LargeMidCap 250 index.
• In terms of returns, the Nifty LargeMidCap 250 index has outperformed the large cap Nifty 100 index across all time frames. Over 3 years, it has beaten by 590 bps, over 7 years by 260 bps, over 10 years by 340 bps and over 15 years by 230 bps. The outperformance has been pronounced across time frames.
• To sum up, the Nifty LargeMidCap 250 index Fund will offer a combination of several advantages to the investors. It allows investors to participate in the Indian growth story with a portfolio that is diversified across large caps and mid-caps with a more interesting selection of sectors. It is a single window to participate in large caps and mid-caps in a more structured way. It lowers the cost of portfolio rebalancing through an automated review process and thus also saves on tax implications of rebalancing.

The Nifty LargeMidCap 250 index Fund NFO offers investors to get the best of large caps and mid-caps through a single window portfolio, structured and managed in a passive way.

PERFORMANCE OF NIFTY 100 AND NIFTY MIDCAP 150 FUNDS

The Nifty LargeMidCap 250 Index Fund is an index fund that is benchmarked to the Nifty LargeMidCap 250 index. This index is a combination of the Nifty 100 index and the Nifty 150 MidCap index and combines the best of long term stability and alpha based capital appreciation. In the absence of any direct proxy in the market, we have used a combination of passive Nifty 100 Index funds and passive Nifty 150 MidCap index funds for our analysis. Here is a quick look at how these funds performed over 1-year, 3-years, and since inception. While there are 21 such funds in all, we have only presented 10 funds with 3-year track record. We have considered the regular plans. In all cases, growth option has been taken as the benchmark to eliminate reinvestment risk. Here they are ranked on 3-year returns.

Scheme Name	NAV (in ₹)	Return (%) 1-Year	Return (%) 3-Years	Return (%) Launch	Daily AUM (₹ in Crore)
Nippon India ETF Nifty Midcap 150	228.67	46.51	25.72	26.77	1,734.24
ICICI Prudential Nifty Midcap 150 ETF	22.83	46.54	25.68	30.10	420.35
ABSL Nifty Midcap 150 Index Fund	24.57	45.89	24.88	29.63	284
Nippon India Nifty Midcap 150 Index Fund	25.19	45.50	24.75	29.48	1,630.77
Motilal Oswal Nifty Midcap 150 Index Fund	38.66	45.48	24.74	30.82	1,924.37
Sundaram Nifty 100 Equal Weight Fund	184.39	45.65	18.15	12.28	97.64
LIC MF Nifty 100 ETF	285.30	32.29	14.79	16.82	760.17
ICICI Prudential Nifty 100 ETF	29.18	32.10	14.57	16.84	99.38
Nippon India ETF Nifty 100	277.49	32.01	14.52	15.04	266.02
Axis Nifty 100 Index Fund	22.43	31.50	13.99	17.85	1,718.05

Data Source: AMFI

The table above provides the performance of the Nifty 100 and Nifty MidCap 150 funds, over 1-year, 3-years, and since inception. There are a total of 21 such funds in India managing a combined  corpus of ₹12,335 Crore between them. Only the funds with 3-year track record are shown in the table above.

• Let us first look at the returns on the above funds over a 1-year period. On a 1-year returns basis, these funds generated maximum returns of 46.65% and minimum returns of 31.50%, which is a fairly attractive worst-case scenario. The average returns over a 1-year period was 41.21%, which is impressive. There was a 100% probability of being among best performing asset class among asset classes in India over a 1-year period.
• Let us first look at the returns on these funds over a 3-year period. On a 3-year returns basis, these funds generated maximum returns of 25.72% CAGR and minimum returns of 13.99% CAGR , which is a healthy worst-case scenario. The average returns over a 1 year period were impressive at 20.18%. Again, there is a 100% probability of being among the best performing asset class over a 3-year period.
• Let us finally look at the returns on these funds since inception. These funds generated maximum returns of 56.53% CAGR and minimum returns of 12.28% CAGR, which is healthy worst-case scenario. The average returns since inception were impressive at 28.56%; but the dispersion is quite high, albeit due to different time frames.
• Let us look at whether it is the NSE 100 index or the NSE Midcap 150 index that dominates returns. There are no two opinions. In terms of 1 year returns and in terms of 3 year returns; it is the NSE MidCap 150 index that is leading the return charts.

This is a good passive theme to create a portfolio that is distributed 50% in large caps and 50% in mid-cap stocks.

GLANCE AT THE HDFC NIFTY LARGEMIDCAP 250 INDEX FUND NFO

Here are some details of the HDFC Nifty LargeMidCap 250 Index Fund NFO you must know to decide on investing in the fund.

• The NFO of HDFC Nifty LargeMidCap 250 Index Fund opens for subscription on September 20, 2024 and will close on October 04, 2024. Being an open-ended passive thematic index fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The HDFC Nifty LargeMidCap 250 Index Fund is best suited to investors looking for long term outperformance with more calibrated management of risk. It creates an index portfolio with 50% of the portfolio linked to large caps and the balance 50% of the portfolio linked to mid-caps.
• The core focus of the HDFC Nifty LargeMidCap 250 Index Fund, being a passive index fund, is to mirror the Nifty LargeMidCap 250 Index in TRI (total returns index) terms. The fund will invest in the components of the Nifty LargeMidCap 250 Index in the same proportions and look to minimize the tracking error in the process. The focus will be on long-term capital appreciation, through a passive approach to investing in this combination of two indices. A holding period of 5-7 years at the very least is suggested to realize full benefits.
• On the Standard SEBI Risk-O-Meter, the HDFC Nifty LargeMidCap 250 Index Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities (95% to 100%) that the HDFC Nifty LargeMidCap 250 Index Fund will have. In addition, there is the risk of entering into the markets at lifetime highs as well as the risk of focusing half the portfolio on the Mid-cap index which has a risk of volatile business model and stiff valuations. Being an index fund, the risk of tracking error is also there; meaning the actual performance could diverge from the index.
• The HDFC Nifty LargeMidCap 250 Index Fund is about generating long term capital growth through a passive approach to a combination of large and mid-cap stocks. It will focus on themes like BFSI, IT, capital goods and healthcare. While the first two would be large cap driven, the last two themes will be mid-cap driven. While allocation will be in the same proportion as the index components, some variations are likely due to factors like liquidity maintenance, quarterly rebalancing gaps etc. The fund will offer growth option and the IDCW option to investors.
• Investors can invest in the NFO of HDFC Nifty LargeMidCap 250 Index Fund in minimum size of ₹100 lumpsum and in multiples of ₹1 thereof. This also applies to additional purchases and switch-ins. The fund also supports the systematic investment plans (SIPs), systematic withdrawal plans (SWP), and the systematic transfer plans (STPs) programs on a structured and long term basis. The SIP investments will also have a minimum tranche limit of ₹100 per tranche.
• There is no entry load, and, being an index fund, there is also no exit load on the fund. Normally, the exit loads are levied to protect the interests of continuing investors in the fund. However, leaving aside the exit loads, it is recommended that investors should hold this fund for at least 5-7 years to realize the full potential manage to the cycles.
• Despite being an index fund, the HDFC Nifty LargeMidCap 250 Index Fund does not give any guarantee on returns and the performance of the fund is subject to the vagaries of the markets in general and the performance of the tourism sector in particular. The HDFC Nifty LargeMidCap 250 Index Fund will be benchmarked to the Nifty LargeMidCap 250 Index TRI, which the fund managers will seek to mirror by minimizing the tracking error. However, there is a possibility that the fund may not be able to precisely mirror underlying Tourism index, due to factors like dividends, liquidity requirements, and index changes calling for rebalancing.
• The HDFC Nifty LargeMidCap 250 Index Fund will be managed by Nirman Morakhia and Arun Agarwal. The intent of the fund management team will be to mirror the Nifty LargeMidCap 250 Index TRI by minimizing the tracking error to the extent possible. Computer Age Management Services (CAMS) will be the registrars to the fund.

The HDFC Nifty LargeMidCap 250 Index Fund NFO offers an opportunity for investors to participate in the upside opportunity of an India-centric portfolio that mirrors the Indian growth story moving to a higher plane; with a judicious mix of alpha and beta.

TAX TREATMENT FOR HDFC NIFTY LARGEMIDCAP 250 INDEX FUND

HDFC Nifty LargeMidCap 250 Index Fund will be classified as an equity fund for tax purposes. The tax provisions below are pursuant to the changes made in the full Union Budget presented on July 23, 2024; and changes are effective for transactions after July 23, 2024.

• Dividends declared (if any) by the fund will be taxed at the peak rate of tax applicable. In addition, if the overall dividends exceed ₹5,000 in a year, they will be subject to tax deduction at source (TDS) at the extant TDS rates.
• Time frame for classification as long term capital gains (LTCG) will remain 1 year for the HDFC Nifty LargeMidCap 250 Index Fund. STCG (held for less than 1 year) will be taxed at 20% on gains plus cess at 4%, making effective STCG rate 20.80%.
• The LTCG on the fund (1 year holding and above) will be taxed at a flat rate of 12.5%. However, threshold exemption limit has been increased from ₹1 Lakh to ₹1.25 Lakhs. In this case, the actual tax impact will be 13% after including 4% cess.

It is what you earn from the HDFC Nifty LargeMidCap 250 Index Fund in post-tax terms that matters. That is why, it is essential to understand tax implications.