Weekly Musings – NFO Pick (PGIM India Large and Mid-Cap Fund)

28 Jan 2024 , 06:41 AM

WHAT EXACTLY ARE LARGE AND MID-CAP FUNDS?

Active large and mid-cap funds in the mutual fund lexicon offer a diversified portfolio of large cap stocks and mid-cap stocks. In short, these large and mid-cap funds combined the stability, pedigree, and history of large caps with the alpha potential and fleet-footedness of the mid-caps. A typical multi-cap fund tends to become overly focused on the small caps also, where liquidity could be an issue. 

At the same time, flexi-cap funds tend to favour large caps over mid-caps and small caps. In short, the large and mid-cap funds offer a good halfway solution between the stability of large caps and the alpha potential of mid-caps without taking on too much risk in the small caps. The popularity of the large and mid-cap funds is evident in the way the AUM of this category has picked up in the last couple of years. It is clearly a midpoint solution that is appealing to a lot of investors.

WHAT LARGE AND MID-CAP FUNDS BRING TO THE TABLE?

Here are some of the benefits of combining the large and mid-sized players through an organized and methodical approach called the large and mid-cap funds.

• The large and mid-cap funds have provided higher average risk adjusted returns to investors across market cycles. They are higher on the return scale compared to large caps and lower on the risk scale compared to the mid-caps.

   

• In terms of portfolio fit, the large and mid-cap funds can be a very useful addition to the core portfolio. That is because, these funds offer the pedigree and track record of the large caps with the growth and alpha potential of the mid-caps.

   

• In India, the large caps tend to be concentrated sectors like financials, IT, oil and FMCG. However, the mid-caps bring in a lot of new age businesses also, that can bring about a much better balance between stability and growth.

   

• Active management is one of the key features here. Depending on the changing market conditions, empirical testing of data and fund manager view, the portfolio can be weighted more in favour of the large caps or in favour of the mid-caps.

   

• Rebalancing of the large and mid-cap mix is automatic in the case of large & mid-cap funds. Compared to doing such rebalancing actively, the investor also saves substantially on costs as well as on tax implications.

In short, large, and mid-cap funds average the returns and also the risks of large and mid-caps. In effect, the product offers better risk-adjusted returns on the portfolio.

DOES THE LARGE AND MID-CAP FORMULA WORK IN PRACTICE

They say that the proof of the pudding lies in the eating and so let us look at some of the statistics on whether the concept of large and mid-caps is really working in practice.

• If you look at the 3 year rolling return and risk of large and mid-cap funds, then its returns are higher than large caps and small caps but lower than mid-caps. However, in terms of rolling risk, large and mid-cap fund have the lowest risk compared to other categories. Similar observations are also seen in 5 year rolling risk and returns.

   

• How do large and mid-cap funds work in rising and falling markets. On the downside the large and mid-cap funds bring almost similar downside protection as large caps. If you consider 3 year rolling returns over the last 18 years, then even on the upside, the large & mid-cap funds tend to mirror the upside participation of mid-caps.

   

• Do large and mid-cap funds actually outperform the large caps over a long term time frame? It has outperformed the large caps on 60% on the occasions. On the upside, the average outperformance of large and mid-cap funds has been +3.4% while on the downside, the average underperformance of large and mid-cap funds was -2.1%.

   

• The portfolio of large and mid-cap funds is more balanced. Its exposure to BFSI, IT, oil & gas and FMCG is much lower than the large cap funds. However, the large and mid-cap funds have a much higher exposure than the large cap funds to sectors like capital goods, healthcare, power, and chemicals. Overall, diversification favours growth stories.

   

• The combination of large and mid-cap funds brings participation in some very interesting and high growth sectoral stories. Such sectors include auto ancillaries, discretionary retail, new age fintech companies, industrial & capital goods, affordable housing, real estate development, chemicals and even staffing services. It is much broader.

   

If all this is true, has the large and mid-cap category of funds actually taken off in India? Here again, one only needs to look at the data to get a feel. AUM of large and mid-cap funds has grown from Rs47,933 crore in April 2019 to Rs187,757 crore in October 2023. That is 4X growth or 34% CAGR. Since April 2021 till December, the flows into large and mid-cap funds have been positive every month, as per the AMFI data.

HOW IS PGIM LARGE AND MID-CAP FUND PORTFOLIO POSITIONED

Here are some key pointers towards how the portfolio of PGIM Large and Mid-cap portfolio will be structured.

• The allocations to large and mid-caps will range between 35% and 65% each. The active fund management will tweak the share of large and mid-caps based on outlook. The balance 30% will be deployed in small caps and other debt products. However, it is likely that a higher share of up to 85% may be deployed in large and mid-cap equity.

   

• The equity portfolio will be based on stock selection and portfolio construction (mix). Stock selection will be based on quality (higher than average sustainable ROE); growth (higher than average sustainable growth); and management (track record of good capital allocation and positive operating cash flows.

   

• Portfolio construction will be focused on 160-200 stocks based on valuation, market cap, liquidity, and macro outlook. Portfolio construction will be based on the principles of diversification and high active share. Portfolio mix of large and mix-caps will be based on the valuation premium / discount to the fair value.

The combination of these 3 factors will determine the stock selection and asset allocation process of the PGIM Large and Mid-Cap Fund.

PERFORMANCE OF ACTIVE LARGE AND MID-CAP EQUITY FUNDS IN INDIA

Here is a quick look at the best performing large and mid-cap equity funds in India as of January 26, 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)
Baroda BNP Paribas Large & Mid Cap Fund	23.22	36.81	28.19	24.03		1,008.13
Mahindra Manulife Large & Mid Cap Fund	25.18	42.17	25.44	27.38		1,760.57
Motilal Oswal Large and Midcap Fund	25.72	44.32	24.72	26.99		3,207.99
Mirae Asset Large & Midcap Fund	138.43	32.52	22.98	20.58	21.71	32,580.71
Union Large & Midcap Fund	22.11	31.53	21.13	20.30		643.79
Canara Robeco Emerging Equities Fund	223.84	26.98	20.72	18.62	19.25	19,726.43
Quant Large and Mid-Cap Fund	110.68	43.10	20.16	30.49	25.42	1,589.59
HSBC Large and Mid-Cap Fund	22.20	35.93	18.05	19.91		2,625.47
Invesco India Growth Opportunities Fund	82.69	38.72	17.53	20.24	18.89	4,715.05
Kotak Equity Opportunities Fund	302.46	32.74	17.41	22.14	20.61	17,927.89
DSP Equity Opportunities Fund	531.52	34.65	17.12	21.72	19.91	10,413.00
Edelweiss Large & Mid Cap Fund	80.46	35.03	16.82	22.98	20.73	2,666.35
Tata Large & Mid Cap Fund	494.99	26.94	16.76	21.33	19.62	6,158.57
Navi Large & Midcap Fund	35.04	27.39	16.65	22.67	18.59	279.23
ICICI Prudential Large & Mid Cap Fund	850.81	33.44	16.64	27.73	21.47	10,547.19
Bandhan Core Equity Fund	118.12	42.73	15.96	26.18	20.87	3,610.15
Aditya Birla Sun Life Equity Advantage Fund	831.61	31.53	15.73	15.23	16.00	5,487.14
Sundaram Large and Mid-Cap Fund	76.77	29.13	15.67	20.74	18.91	5,958.61
LIC MF Large & Mid Cap Fund	34.55	33.43	14.91	20.03	18.63	2,500.53
UTI Large & Mid Cap Fund	145.91	36.20	14.81	24.87	18.95	2,449.39
Franklin India Equity Advantage Fund	163.28	28.08	14.72	18.10	15.52	3,069.75
Bank of India Large & Mid Cap Equity Fund	83.50	33.71	14.56	21.77	20.08	274.93
Nippon India Vision Fund	1,214.93	38.53	14.47	22.29	19.19	4,089.69
HDFC Large and Mid-Cap Fund	288.33	41.69	14.10	28.50	21.64	15,575.44

Data Source: AMFI India

Currently, active equity large and mid-cap funds manage around Rs1,58,866 crore (Rs1.59 trillion approximately) in terms of AUM. All large and mid-cap funds have given positive returns over a 1 year period, 3 year period, 5-year period, and since inception. Those large and mid-cap funds without 5-year history would have the returns field as blank. These large and mid-cap funds combine the stability of large caps with the alpha potential of mid-caps. In all the cases the direct plans have been considered. Average returns of large and mid-cap funds were 34.89% over 1 year, 22.70% CAGR over 3 years, 19.79% CAGR over 5 years and 18.14% CAGR since inception.

How volatile are these large cap returns? What explains net inflows into mutual funds gravitating towards large and mid-cap funds in recent years. Here are the variations in returns? Over a 1 year period, returns on large and mid-cap funds ranged from 44.32% to 26.94%. Over a 3 year period, returns on large and mid-cap funds ranged from 30.49% to 15.23%. Over a 5 year period, returns on large and mid-cap funds ranged from 25.42% to 15.52%. In terms of returns since inception, the range is from 28.19% to 14.10%. Compared to large cap funds, the base returns are much higher, while compared to mid-cap funds the volatility of large and mid-cap funds is much lower.

GLANCE AT THE PGIM INDIA LARGE AND MID-CAP FUND NFO

Here are some details of the PGIM India Large and Mid-Cap Fund NFO you must know to decide on investing in the fund.

1. The NFO of PGIM India Large and Mid-Cap Fund has opened for subscription on January 24, 2024 and the NFO subscription will close on February 07, 2024. Being an open ended fund, the fund house will offer purchase and redemption at NAV linked prices.

    

2. The PGIM India Large and Mid-Cap Fund NFO offers an opportunity to investors to participate in a diversified equity portfolio of large cap and mid-cap stocks in India. It is still a high risk fund, but it combines the stability of the large caps with the alpha potential of mid-caps. While the returns are averaged, so is the risk in this portfolio.

    

3. Entry loads do not exist in India. In terms of exit loads, if you redeem within 90 days from the date of allotment, it will attract exit load of 0.50% on redemption value. This also applies if holdings are switched to another fund within 90 days. Beyond 90 days, there is no exit load. 

    

4. Let us turn to minimum investment in the NFO. Investors can put in applications for a minimum of Rs5,000 in the NFO and in multiple of ₹1 thereafter. Additional purchases can be of minimum Rs1,000 and in multiples thereafter.

    

5. 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. Dividend plans offer payout and reinvestment options.

    

6. How will the fund be benchmarked? The benchmark for the fund will be benchmarked to the Nifty LargeMidCap 250 TRI (total returns index). The fund managers for the PGIM India Large and Mid-Cap Fund will be Vinay Paharia, Anandha Padmanabhan, and Utsav Mehta for the equity portion; Puneet Rai for the debt portion and Ojasvi Khicha for the overseas investment component.

    

7. The investment objective of the fund is to seek long-term capital growth and outperform the Nifty LargeMidCap 250 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 PGIM India Large and Mid-Cap Fund is also open to the risk of stock selection and fund manager bias in the process.

The PGIM India Large and Mid-Cap Fund NFO is an opportunity for investors to participate in a portfolio which combines the merits of large caps and mid-caps into a single offering. The focus on large and mid-caps combines the pedigree and track record of large caps with the growth and alpha potential of mid-caps. This is an opportunity for investors to de-risk their portfolios if it is predominantly weighted in favour of small and mid-caps. Large and mid-cap funds offer the benefits of diversification and growth with a much lower risk quotient.