Weekly Musings – NFO Pick (Motilal Oswal Large Cap Fund)

22 Jan 2024 , 08:09 AM

WHAT EXACTLY ARE LARGE CAP FUNDS?

Active large cap funds in the mutual fund lexicon offer a diversified portfolio of large cap stocks that offer stability, pedigree, and a history of performance. In the last few years, large cap funds have struggled to match up to small cap funds and mid-cap funds in terms of fund flows. However, that can be attributed more to kurtosis and the large base effect. What exactly does a large cap really mean? If you go by the strict SEBI definition, then the top 100 stocks ranked in terms of market capitalization would rank as the large cap universe in India.

Would the large cap portfolio look like a passive Nifty portfolio? While it would still have a high corelation with the Nifty, the large cap portfolio has 100 stocks to choose from and no necessity to match the index weightages. That is what can generate alpha. In our latest mutual fund NFO series, we look at the upcoming new fund offering (NFO) of Motilal Oswal Large Cap Fund, an active large cap fund investing in the 100 largest and most valuable stocks in the Indian markets.

UNDERSTANDING THE LARGE CAP UNIVERSE IN INDIA

As stated earlier, the fund will follow the standard definition of large caps, which is the 100 largest listed companies by market cap. The portfolio of the Motilal Oswal Large Cap Fund will be drawn from this universe.

• The 100 companies in the large cap universe have combined market cap of Rs250,000 crore and accounts for 64% of the overall market cap of the Indian equity markets. The smallest company in the universe has a market cap of Rs67,018 crore while the most valuable company in the list (Reliance Industries) has a market cap of Rs16,39,000 crore.
• Large caps are significant contributors to the Indian economy in more ways than one. For instance, they contribute nearly 35% to India’s GDP. In addition, 68% of the revenues and 74% of the net profits of all the listed companies in India comes from these 100 large cap companies. They account for 64% of the market cap of the BSE.
• Large caps are the best proxy for an investor looking to play the story of India’s GDP transitioning from $3.5 trillion to $5.0 trillion in the next 7 years. India did not feature in the top-10 by GDP till the year 2000. By 2030, India GDP is expected to cross Germany and Japan to emerge as the third largest economy after China and the US.
• However, Indian large caps are still not too big by global standards. For instance, India’s most valuable company (Reliance) ranks 55th in the world market cap rank. Only 3 companies (RIL, TCS and HDFC Bank) rank in the global top-100 by market cap. That implies a huge upside opportunity for Indian large-caps as they scale up rapidly.

It is essential to put the India large cap story in context. As the economy takes the big leap, it is the large caps that are most likely to represent this shift in global equations.

DO INDIAN LARGE CAPS STILL OFFER VALUE?

Before investing in the Motilal Oswal Large Cap Fund, that is a logical question to ask. Here is why, the potential for large caps is still huge in the Indian context.

• Over the last 21 years between 2003 and 2024, the Nifty TRI value of 1,000 has grown to Rs29,037. This 29 times appreciation in 21 years implies an average CAGR (compounded annual growth rate) of 17.4% over this 21 year period. In other words, an investment of Rs1 lakh in the Nifty 100 in 2003 would be worth Rs2.90 crore today. That is certainly a lot of value created and makes large caps a lucrative proposition in TRI terms.
• Let us benchmark the returns of large cap 100 to the average debt returns of 7%. What is the probability of the Nifty 100 beating the 7% returns over different time frames? The probabilities of beating debt are 99.2%, 98.2% and 85.1% for holding periods of 10 years, 7 years, and 5 years respectively. Whether, you had done a SIP or a lumpsum investment, the probability of beating debt is substantial in a large cap equity portfolio.
• To get a sharper picture, let us look at large cap 100 returns net of the inflation effect. If you look at debt, the corpus (net of inflation) would have grown to just 1.2X over 21 years. However, if you look at the large cap 100 portfolio, it has grown 8.7X (net of inflation). In short, investors can trust large caps to really beat inflation effectively over the long run. Debt can at best offer you status quo in real terms.
• You don’t just compare large and mid-caps on returns, but how they bounce back in a crisis situation. That is called the process of index drawdown and recovery. During the GFC of 2008, the large caps recovered old highs in 34 months while small and mid-caps took 78 months to get back to old highs. In the post-COVID crash, large caps recouped all losses from the peak in 10 months, while it took small and mid-caps a full 37 months.

The past is surely a convincing story, but what about current valuations of large cap stocks, when Nifty and Sensex are at historic highs?

LARGE CAPS ARE ATTRACTIVE IN VALUATION TERMS

The good thing for the Motilal Oswal Large Cap Fund NFO is that the large cap stocks also have the valuation story going for them. Here is why.

• The Nifty 100 to Nifty Mid-cap 150 ratio had peaked at 2.9X in 2008 and has since been persistently falling. Today, the ratio of the large cap index to the mid-cap index, small cap index and the micro-cap index; is at multi-year lows and also below the historic averages. That makes an interesting valuation case for large caps.
• The Nifty Large Cap 100 has an ROE of 16% compared to 15% for mid-caps and 13% for small caps. However, the trailing P/E of large caps stands at 21.9X, compared to 24.9X for the mid-caps and 25.6X for the small caps. The dichotomy is clearly pointing to a valuation disconnect for the large caps, that needs to be filled.
• In the last 5 years, the share of sales of 100 large cap companies in the total sales has grown from 65.0% to 65.8% while the share of profits has grown from 73.6% to 74.1%. Ironically, during this same 5-year period, the large cap of overall market cap has fallen sharply from 72.3% to 64.0%.

In addition, the FPI ownership in the Nifty 500 is at multi-year lows and that is expected to reverse, something that will be positive for the large cap story. That is a clear positive for the Motilal Oswal Large Cap Fund NFO.

PERFORMANCE OF ACTIVE LARGE CAP EQUITY FUNDS IN INDIA

Here is a quick look at the best performing index funds and index ETFs benchmarked to the Nifty or the Sensex as of January 19, 2024. Returns beyond 1 year are CAGR returns.

Scheme  Name	NAV  Direct	1-Year (%)  Returns	Launch (%)  Returns	3-Year (%) Returns	5-Year (%)  Returns	Daily AUM  (₹ in Crore)
Sundaram Large Cap Fund	19.61	22.75	22.83	16.77	16.34	3,289.37
Quant Large Cap Fund	13.42	32.67	22.52	N.A.	N.A.	479.23
WhiteOak Capital Large Cap	12.05	26.61	17.90	N.A.	N.A.	381.76
ITI Large Cap Fund	16.41	28.37	17.50	16.12	N.A.	232.43
Mirae Asset Large Cap Fund	105.19	19.49	16.85	14.80	15.78	37,471.07
Nippon India Large Cap	81.05	33.87	16.71	24.15	18.31	21,028.38
Mahindra Manulife Large Cap	21.12	23.16	16.66	17.21	N.A.	339.58
ICICI Prudential Bluechip	98.47	29.65	16.24	20.42	18.26	49,127.87
Baroda BNP Paribas Large Cap	207.54	27.26	16.07	17.30	18.38	1,721.10
Bank of India Bluechip Fund	14.61	35.28	15.97	N.A.	N.A.	118.54
Invesco India Large Cap	66.12	31.66	15.76	18.85	17.17	908.90
SBI Bluechip Fund	84.73	21.72	15.75	16.22	16.75	43,208.11
Edelweiss Large Cap Fund	79.63	27.47	15.42	17.66	17.90	703.26
Canara Robeco Bluechip	58.55	24.52	15.33	16.02	18.69	11,776.14
Kotak Bluechip Fund	532.94	24.17	15.18	17.00	17.87	7,405.41
Axis Bluechip Fund	58.07	20.63	15.09	10.77	15.05	32,509.21
Aditya Birla Sun Life Frontline	476.09	24.35	15.08	17.07	15.83	25,952.93
HDFC Top 100 Fund	1,060.05	30.84	14.87	21.44	16.86	30,721.22
Tata Large Cap Fund	482.48	25.75	14.37	18.62	16.65	1,885.96
PGIM India Large Cap Fund	343.08	20.13	14.29	13.57	15.06	531.77
UTI Large Cap Fund	252.47	21.87	14.18	14.73	15.98	11,975.71
JM Large Cap Fund	151.81	32.50	13.78	19.12	16.97	73.82
Bandhan Large Cap Fund	71.49	30.21	13.69	16.50	16.66	1,318.54
HSBC Large Cap Fund	443.71	27.74	13.64	15.83	16.59	1,700.53
Groww Large Cap Fund	43.37	25.35	13.40	15.62	14.64	112.74
LIC MF Large Cap Fund	52.66	19.09	13.12	13.84	15.30	1,352.57
Franklin India Bluechip Fund	923.21	21.97	13.03	14.98	14.47	7,383.21
Union Large Cap Fund	21.56	24.34	12.16	15.76	15.88	287.10
DSP Top 100 Equity Fund	403.76	27.05	12.15	15.08	14.97	3,349.89
Taurus Large Cap Fund	139.96	24.41	10.87	14.68	13.38	41.26

Data Source: AMFI India

Currently, active equity large cap funds manage around Rs2,97,388 crore (Rs2.97 trillion) in terms of AUM. All large cap funds have given positive returns over a 1 year period, 3 year period, 5-year period, and since inception. This is on account of the outperformance of equity as an asset class compared to other assets post the pandemic. In all the cases the direct plans are considered. Average returns of large cap funds were 26.16% over 1 year, 16.67% CAGR over 3 years, 16.39% CAGR over 5 years and 15.35% CAGR since inception.

How volatile are these large cap returns? What explains net inflows into mutual funds gravitating away from large cap funds and towards index funds and index ETFs. Here are the variations in returns? Over a 1 year period, returns on large cap funds ranged from 35.28% to 19.09%. Over a 3 year period, returns on large cap funds ranged from 24.15% to 10.77%. Over a 5 year period, returns on large cap funds ranged from 18.69% to 13.38%. In terms of returns since inception, the range is from 22.83% to 10.87%.

GLANCE AT THE MOTILAL OSWAL LARGE CAP FUND NFO

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

1. The NFO of Motilal Oswal Large Cap Fund has opened for subscription on January 17, 2024 and the NFO subscription will close on January 31, 2024. Being an open ended fund, the fund house will offer purchase and redemption at NAV linked prices.
2. The Motilal Oswal Large Cap Fund NFO offers an opportunity to investors to participate in a diversified equity portfolio of large cap stocks in India with pedigree, existing track record, a reputation to boot, as well as a history of stock market returns to investors.
3. Entry loads do not exist in India. In terms of exit loads, if you redeem within 15 days, then it attracts exit load of 1% on redemption value. This also applies if holdings are switched to another fund within 15 days. Beyond 15 days, there is no exit load. There is no exit load for switching between plans and options of the same scheme.
4. Let us turn to minimum investment in the NFO. Investors can put in applications for a minimum of Rs500 and in multiple of ₹1 thereafter.  The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option.
5. How will the fund be benchmarked? The benchmark for the fund will be benchmarked to the Nifty 100 TRI (total returns index). The fund managers for the Motilal Oswal Large Cap Fund will be Atul Mehra for the equity part, Rakesh Shetty for debt and Ankush Sood for the international equity component.
6. The investment objective of the fund is to outperform the Nifty 100 TRI index, although returns are not assured. It is classified as a high risk fund. Apart from the systematic and unsystematic risk inherent in equities, the Motilal Oswal Large Cap Fund is also open to the risk of stock selection and fund manager bias in the process.

The Motilal Oswal Large Cap Fund NFO is an opportunity for investors to participate in large cap stocks at a time when their valuations are at a relatively historic low. This is an opportunity for investors to de-risk their portfolios if it is predominantly weighted in favour of small and mid-caps. Large cap funds offer the benefits of diversification and growth with a higher reliability quotient.