While both large and mid cap funds have been at the receiving end of volatility in equity markets, by and large, the latter have been worse hit. In some ways, this performance typifies the relatively higher risk associated with mid cap investments.

Large cap companies tend to have predictable revenue streams. Information about them is widely available and they are exhaustively researched as well. Hence, over longer time frames, they are less likely to spring an unpleasant surprise on investors vis-à-vis mid/small cap companies. In other words, large cap investments are expected to deliver a steady performance over the long-term. Large cap funds with predominant investments in large cap stocks imbibe similar traits.

Having said that, there are some investment avenues in the large cap space that choose to tread the risky path. For instance, there is a rather niche segment of large cap funds, that pursue an aggressive investment strategy. Magnum Equity Fund (MEF) is one such fund. Now is an interesting time to put the fund's performance under the scanner.

MEF's investment proposition
MEF is a large cap offering from SBI Mutual Fund. Launched in January 1991, the fund professes to offer growth by actively managing a portfolio comprised of select blue chip stocks. The fund house has two large cap offerings in its arsenal  MEF and SBI Blue Chip Fund. MEF has been positioned as the more aggressive of the two i.e. the fund doesn't shy away from taking concentrated stock and sector bets. It is mandated to invest between 70%-100% of its assets in equities, while the balance (30%) can be held in debt and money market instruments.

How MEF fares vis-à-vis peers

	NAV (Rs)	1-Yr (%)	3-Yr (%)	5-Yr (%)	Since Incep. (%)	Std Dev. (%)	Sharpe Ratio (%)
Sundaram Select Focus (G)	75.64	23.5	39.3	43.5	41.1	9.32	0.22
DSP ML Top 100 Equity (G)	71.17	14.8	36.7	43.4	46.4	7.93	0.25
Magnum Equity (D)	28.25	12.0	33.8	42.3	16.4	9.01	0.20
ICICI Prudential Growth (G)	101.33	5.3	30.1	36.5	25.9	7.43	0.17
UTI Mastershare (G)	40.66	12.1	24.9	33.0	20.5	8.46	0.20
BSE 100		11.9	30.2	36.7

(Source: Credence Analytics. NAV data as on June 16, 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)

For the purpose of peer comparison, we have chosen a diverse mix of large cap funds. While Sundaram Select Focus pursues an aggressive investment style akin to MEF, DSP ML Top 100 uses the top 100 stocks by market capitalisation as its investment universe, and then there are funds like ICICI Prudential Growth and UTI Mastershare, whose portfolios show a marked bias for large cap stocks.

Over the 3-Yr time frame, MEF (33.8% CAGR) stands outscored by Sundaram Select Focus (39.3% CAGR) and DSP ML Top 100 (36.7% CAGR). A similar picture emerges over the 5-Yr time frame; although, MEF (42.3% CAGR) trails its peers, the degree of outperformance narrows down considerably. Finally, MEF has outscored its benchmark index i.e. BSE 100 over the 1-Yr, 3-Yr and 5-Yr time frames.
 

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  Volatility
  Standard Deviation is a measure of the degree of risk that the fund has exposed its investors to. MEF (Standard Deviation 9.01%) pitches in a nondescript performance vis-à-vis peers. Peers like ICICI Prudential Growth (7.43%) and DSP ML Top 100 (7.93%) comfortably outscore the fund.

  Risk-adjusted return
  Sharpe Ratio is a measure of returns delivered by the fund per unit of risk borne. Yet again, MEF (Sharpe Ratio 0.20%) is bettered by peers like DSP ML Top 100 (0.25%) and Sundaram Select Focus (0.22%).

  

  As can be seen in the graph above, Rs 100 invested in MEF (on January 1, 2003) would have appreciated to Rs 590 at present. Conversely, a similar investment in the fund's benchmark index would have grown to Rs 486.

  In a nutshell
  MEF's performance on the risk and return fronts (vis-à-vis peers) is competent, but not exceptional. Simply put, the fund has failed to distinguish itself on any parameter.

  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 MEF in their portfolios.

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