In the context of Indian stock markets, there is lack of consensus with regards to the definition of large caps, mid caps and small caps. So most fund houses have their own definitions for various stock categories.
The situation is no different on the mutual fund side. There is no unanimity in what constitutes a large cap fund. Basically, there are two breeds of large cap funds. One is the predominantly large cap variety, whereas the other is the true blue large cap category.
Predominantly large cap funds have the liberty to invest smaller portion of their assets in mid caps, thereby diversifying their holdings. Conversely, true blue large cap funds invest only in large cap stocks. While the former is a common breed in the domestic mutual fund industry, the latter is bit of a rarity.
DSP ML Top 100 Equity Fund (DMLT) belongs to the rare breed of pure large cap funds. But before venturing into its investment proposition, let's first understand the benefits of investing in large cap funds.
Benefits of investing in large cap stocks/funds
Large cap companies typically have well-established track records in terms of earnings/profitability among other factors. These companies are also well-researched as information on them is widely available, so the chances of making a wrong investment call are relatively lower. This makes their performance more predictable when compared to their mid/small cap peers. Large cap funds, given their investments in large cap stocks, imbibe similar traits. These funds are also less risky compared to mid and small cap funds. It is due to these reasons we advocate that investors with risk appetite must invest in well-managed large cap funds, so as to infuse stability in their portfolios over the long-term.
DMLT's investment proposition
DMLT is an open-ended diversified equity fund from the stable of DSP Merrill Lynch Fund Managers. The fund's name as well as its investment objective - to invest in equity securities and equity related securities of the 100 largest corporates, by market capitalisation, listed in India, clearly defines its investment mandate. And in line with its investment objective, large cap stocks dominate the fund's portfolio.
The fund is mandated to invest atleast 90% of assets in equities and related instruments, while upto 10% of the assets can be invested in debt and money market instruments. For stock picking, it adopts a combination of the top down and bottom up approaches. It invests in both, growth as well as value stocks.
How DMLT fares vis-à-vis peers
| |
NAV
(Rs) |
1-Yr
(%) |
3-Yr
(%) |
5-Yr
(%) |
Since
Incep.
(%) |
Std.
Dev.
(%) |
Sharpe
Ratio
(%) |
| DSP ML Top 100 (G) |
74.06 |
16.9 |
39.2 |
45.9 |
48.2 |
7.01 |
0.32 |
| Kotak 30 (D) |
31.99 |
20.5 |
38.4 |
47.5 |
29.9 |
7.31 |
0.27 |
| Magnum Equity (D) |
29.92 |
16.3 |
37.5 |
45.0 |
16.8 |
7.55 |
0.27 |
| Reliance Vision (G) |
210.53 |
6.8 |
32.2 |
46.7 |
27.3 |
7.54 |
0.25 |
| UTI Master Plus (G) |
72.22 |
5.1 |
29.7 |
37.9 |
15.3 |
7.48 |
0.21 |
| BSE 100 |
|
16.3 |
33.9 |
40.4 |
|
|
|
(Source: Credence Analytics. NAV data as on May 27, 2008.)
(Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument)
(Due to the lack of sufficient pure large cap funds with a 3-Yr track record, we have considered some predominantly large cap funds for this analysis.)
DMLT has posted an exemplary performance on the net asset value (NAV) appreciation front across time frames. Over the 3-Yr period, the fund (39.2% CAGR) emerges as the top performer followed by Kotak 30 (38.4% CAGR). UTI Mater Plus (29.7% CAGR) turns out to be the worst performer over this time frame.
Over the 5-Yr period, the fund's performance is competent (45.9% CAGR); however it lags Kotak 30 (47.5% CAGR) and Reliance Vision (46.7% CAGR). Again, UTI Master Plus (37.9% CAGR) languishes at the lowest rung over this period as well.
DMLT has outperformed its benchmark index (BSE 100) across time frames.
Volatility
Standard Deviation measures the risk that the fund has exposed its investors to. With a Standard Deviation of 7.01%, DMLT is the best performing fund in the peer group in terms of restraining volatility. This means that the fund's good showing on the returns front has come at relatively lower risk levels than peers. Magnum Equity (7.55%) is the worst performer on this front.
Risk-adjusted return
Sharpe Ratio is a measure of returns delivered by the fund per unit of risk borne. DMLT (Sharpe Ratio 0.32%) completes its reign of dominance powered by yet another impressive showing. The fund occupies the top slot in the peer group, with Kotak 30 (0.27%) and Magnum Equity (0.27%) sharing the second spot. UTI Master Plus (0.21%) finds itself at the bottom of the peer group.
As can be seen in the graph, Rs 100 invested in DMLT on inception (March 2003) would have grown to approximately Rs 787 by May 27, 2008, while the same amount invested in the benchmark index i.e. BSE 100 would have been worth around Rs 562.
In a nutshell¦
Launched in March 2003, the fund has been in existence for a little over 5 years now. By the virtue of this, the fund has had the opportunity to perform across market cycles; and to its credit, it has not disappointed. Its performance across parameters has been noteworthy, a testimony to its process-driven approach.
What should investors do?
Now the question is, should investors consider investing in the fund? That would ideally depend on their risk appetite, investment objective and existing portfolio, among a host of other factors. At Personalfn, we have always maintained that a one size fits all approach doesn't work while investing. An investment avenue that is apt for one investor could be grossly unsuitable for another. Therefore, investors would do well to consult their investment advisors/financial planners to determine the suitability of DMLT in their portfolios.
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