Weekly Musings – NFO Pick (Helios Large & Mid Cap Fund)

30 Sep 2024 , 12:44 PM

WHY A LARGE & MID CAP FUND AT THIS JUNCTURE?

A large and mid-cap fund has some fascinating arguments in its favour. Here is why one must look at this idea at this juncture.

• Large caps offer greater stability and reliability in terms of long term performance. That also makes these large cap stocks volatile. On the other hand, the mid-caps offer much better growth potential to investor but entail greater volatility. Combining the large caps and mid-caps gets the best of both worlds and helps to enhance risk-adjusted returns.
• Most of the large cap players in the market today are among the industry leaders in their particular industry segments. Their strong market presence is a source of stability to the portfolio. On the other hand, many mid-caps are emerging leaders and the right stocks provide an opportunity to identify and own the leaders of tomorrow.
• Large caps have more stable and matured business models and also offer relatively better dividend yields to investors. That also makes them a relatively defensive play during a downturn. On the other hand, mid-caps are more about cyclical bottom-up exposure and while dividend yields may be low, capital appreciation potential is high.
• Here is one reason; while the large& mid-cap combination can be potent. Large caps are available at around 18.9X 1-year forwards P/E, which is below their 15-year average. Mid-cap P/Es are relatively higher, but being high growth stories in their niche areas, they still manage to offer much better PEG ratios, compared to large caps.
• There is a second reason why this combination will be potent. Over the last 1-year, the performance of large caps has substantially lagged the mid and small caps. So, there is a lot of catching up to do. At the same time, if you look at the Mid-cap 150; 61 stocks gave above 50% returns, 42 stocks gave 20-42% returns and 114 stocks gave above 10%.

But the more important question here why the combination of large and mid-caps can be a good choice at this juncture.

LARGE & MID CAP FUNDS ARE ABOUT THE POWER OF COMBINATION

What is this power of combining large and mid-cap stocks? The following points will illustrate the merits of this combination.

• The large & mid cap fund gives the best combination of these two categories with 35% to 65% allocation to both. Large cap funds, mid-cap funds and small cap funds tend to be overly concentrated only on one category.
• The large & mid-cap index also offers a healthy sectoral mix. It has 24.5% in BFSI, 8.8% in Capital goods, 7.6% in auto, 9.1% in IT/digital, 7.4% in oil & gas, 7.6% in healthcare, 5.5% in FMCG, 3.7% in power, 3.4% in chemicals, and 3.2% in metals and mining.
• Compared to other categories, large & mid-caps have the lowest standard deviation at 18.53% over a 5-year period, showing better risk management. If you look at rolling returns since inception, its 15-year rolling returns stand at an impressive 13.9%.
• In 7 out of the last 10 calendar years, the large & mid-cap category is at par or clearly better than the Nifty 100 index, which shows the power of combining mid-caps and large caps in the quest for better risk-adjusted returns. As a result, the net inflows into large & mid cap funds have grown at a CAGR of 46.1% over last 5 years.

In a nutshell, the combination of large & mid-cap funds promises much better risk-adjusted returns to investors.

WHAT INVESTORS CAN EXPECT FROM HELIOS LARGE & MID-CAP FUND

Here is what investors can expect from the Helios Large & Mid-Cap fund.

• Careful stock selection across large and mid-caps through a very careful and incisive screening process. The screening process will be used to mitigate risk substantially.
• Focus on sustainable investment experience over a longer time frame with accent on consistency, pragmatism, and disciplined investments.
• A natural risk mitigation mechanism by combinn9ig the best of large caps and mid-caps into one single coherent unit to enhance risk adjusted returns.
• Offers the perfect and delicate balance between the stability and dominance of large caps with the growth potential and promise of mid-caps.
• Investors get the benefit of automatic asset allocation without the need for internal churn along with its concomitant cost and tax implications.

While both large caps and mid-caps have their unique cycles, an SIP approach would be able to deliver the best returns over time.

PERFORMANCE OF LARGE & MID CAP FUNDS IN INDIA

The Helios Large & Mid Cap Fund is an active equity fund that will focus purely on a combination of large & mid cap stocks as defined by SEBI. The idea of the fund is to use a mix of large cap beta and mid-cap alpha so as to improve the risk-adjusted returns of the fund. Here is a quick look at how the universe of large & mid cap funds performed in the Indian markets over 1-year, 3-years, and 5-years. While there are 26 large & mid cap funds in India overall, we have only presented the top-20 funds ranked on 5-year CAGR returns. We have considered the direct plans to get over the TER bias. In all cases, growth option has been taken as the benchmark to eliminate reinvestment risk. Here are the top 20 large & mid-cap funds on 5-year returns.

Scheme Name	NAV (in ₹)	Return (%) 1-Year	Return (%) 3-Years	Return (%) 5-Years	Daily AUM (₹ in Crore)
Quant Large and Mid-Cap Fund	143.07	59.12	28.93	30.70	3,809.79
Bandhan Core Equity Fund	161.18	59.40	27.95	27.32	7,009.28
ICICI Pru Large & Mid Cap Fund	1,136.22	51.71	26.07	27.30	17,593.75
HDFC Large and Mid-Cap Fund	371.78	47.25	25.52	27.20	24,680.85
UTI Large & Mid Cap Fund	199.78	53.81	24.29	26.54	4,112.69
Axis Growth Opportunities Fund	36.97	47.00	19.09	26.30	14,661.02
Kotak Equity Opportunities Fund	404.74	46.41	23.37	25.72	26,383.43
Edelweiss Large & Mid Cap Fund	105.77	48.12	22.03	25.36	3,810.55
Canara Robeco Emerging Equities Fund	302.95	47.63	18.95	25.31	25,855.83
Mirae Asset Large & Midcap Fund	175.37	40.71	18.01	25.05	40,984.93
Invesco India Large & Mid Cap Fund	116.22	64.50	24.66	24.79	6,576.76
DSP Equity Opportunities Fund	717.50	52.61	22.05	24.72	14,556.01
Nippon India Vision Fund	1,609.86	51.54	22.41	24.49	5,658.84
SBI Large & Midcap Fund	677.97	39.77	21.79	24.37	29,409.60
HSBC Large and Mid-Cap Fund	30.68	51.98	23.63	24.03	3,762.93
Sundaram Large and Mid-Cap Fund	99.97	43.46	19.00	23.58	7,318.78
BOI Large & Mid Cap Equity Fund	106.18	44.72	19.94	23.44	379.82
LIC MF Large & Mid Cap Fund	46.39	51.24	20.39	23.18	3,248.22
Tata Large & Mid Cap Fund	632.31	37.72	20.32	22.47	8,774.31
Navi Large & Midcap Fund	44.42	34.58	18.59	21.75	336.10

Data Source: AMFI

The table above provides the performance of the top 20 active large & mid cap funds over 1-year, 3-years, and 5-years; with the ranking on 5-year returns to give a long term flavour. There are a total of 26 such funds in India managing a combined  corpus of ₹2,70,675 Crore between them. Only the funds with 5-year track record have been considered.

• Let us first look at the returns on the above funds over a 1-year period. On a 1-year returns basis, the large & mid cap funds generated maximum returns of 64.50% and minimum returns of 34.58%, which is a fairly attractive worst-case scenario. The average returns over a 1-year period was 48.28%, which is impressive. There was a 100% probability of being among best performing asset class 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 large & mid cap funds generated maximum returns of 28.93% CAGR and minimum returns of 12.79% CAGR , which is a healthy worst-case scenario. The average returns over a 3-year period were impressive at 21.91%. Over a 3-year period, the returns have been relatively more erratic, which has impacted the minimum returns.
• Let us finally look at the 5-year returns on large & mid cap funds. These funds generated maximum returns of 30.70% CAGR and minimum returns of 20.16% CAGR, which is healthy worst-case scenario. The average returns since inception were impressive at 24.79%; with 5-year dispersion lower than the 3-year dispersion in returns.

Despite considering a fairly large universe of 26 large & mid cap funds, the returns across time frames continue to be impressive.

GLANCE AT THE HELIOS LARGE & MID CAP FUND NFO

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

• The NFO of Helios Large & Mid Cap Fund opens for subscription on October 10, 2024 and will close on October 24, 2024. Being an open-ended active large & mid cap fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The Helios Large & Mid Cap Fund is best suited to investors looking for long term outperformance with a higher exposure to a combination of large and mid-cap stocks; with a view to combine beta stability and alpha generation
• The core focus of the Helios Large & Mid Cap Fund, being an active large & mid cap fund, is to outperform the Nifty Large Mid Cap 250 TRI (total returns index). The fund will have a minimum 70% exposure to large and mid-cap stocks; with the balance 30% at the discretion of the fund manager across small caps / micro caps / debt / money market instruments etc. The fund’s large cap exposure will oscillate between 35% and 65% while the mid-cap exposure will also oscillate between 35% and 65% of the portfolio.
• On the Standard SEBI Risk-O-Meter, the Helios Large & Mid Cap Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities (70% to 100%) that the Helios Large & Mid Cap Fund will have. In addition, there is the risk of entering into the markets at lifetime highs as well as relatively steep valuations of mid-caps. Being an active fund, the risk of fund manager bias and errors in stock selection can also impact the returns of the fund.
• The Helios Large & Mid Cap Fund is about generating long term capital growth through an active approach to identify large caps and mid-caps; through a process of top-down and bottom-up approaches. The sectoral mix will reduce the BFSI / IT predominance of large caps and include sectors like chemicals, capital goods etc where mid-caps predominate. While allocation will be predominantly in equities, there could be some outlays to debt. The fund will offer growth option and the IDCW option to investors. The fund will also offer the Regular Plans as well as the Direct Plans as per SEBI guidelines.
• Investors can invest in the NFO of Helios Large & Mid Cap Fund in minimum size of ₹5,000 lumpsum and in multiples of ₹1 thereof. For additional purchases and switch-ins as well as for monthly SIPs, the minimum size will be ₹1,000 and in multiples of ₹1 thereof. 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 fund also offers customized plans like the SIP Pause, Step-Up SIP, Micro SIP, and Value STP to investors.
• There is no entry load, but conditional exit load will be there to protect the interests of the continuing investors in the fund. If units are redeemed within 3 months of the allotment date, then there will be no exit load up to 10% of the purchased units. Any redemption beyond 10% of the purchased / switched in units in under 3 months will attract an exit load of 1% of redemption value. There will be no exit loan if units are held beyond 3 months. However, aside from exit loads, investors are advised to hold this fund for at least 5-7 years to realize the full potential across business cycles.
• Being an equity fund, the Helios Large & Mid Cap 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 stocks and the fund managers in particular. The Helios Large & Mid Cap Fund will be benchmarked to the Nifty Large & Mid Cap 250 Index TRI, which the fund managers will seek to outperform. However, there is a possibility that the fund may not be able to outperform the benchmark index.
• The Helios Large & Mid Cap Fund will be managed by Alok Bahl and Pratik Singh. The intent of the fund management team will be to beat the Nifty Large & Mid Cap 250 Index TRI through innovative and astute stock selection and asset allocation. Computer Age Management Services (CAMS) will be the registrars to the fund.

The Helios Large & Mid Cap Fund NFO offers an opportunity for investors to participate in markets by combining the stability of large caps and the alpha potential of mid-caps, so as to enhance risk-adjusted returns.

TAX TREATMENT FOR HELIOS LARGE & MID CAP FUND

Helios Large & Mid Cap 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 Helios Large & Mid Cap 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 Helios Large & Mid Cap Fund in post-tax terms that matters. That is why, it is essential to understand tax implications.