Sensex at 50,500 and Nifty 50 at 15,000 by December 2021?
The reports of further potential upside from the current high market levels may sound too good to be true. But market experts believe that the rally is here to stay and expect the bellwether indices to claim fresh record highs in 2021.
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The year 2020 turned out to be one of the most volatile phases for the equity market due to the COVID-19 pandemic and the resultant lockdown. Despite this, the S&P BSE Sensex and Nifty 50 staged a smart recovery and gained 14.8% and 14%, respectively due to strong liquidity flow in the market.
Considering that the worst of the pandemic is behind us, things can only get better for the equity market going forward. The best way to participate in this expected upward market trend without exposing your portfolio to high risk is through investment in large cap funds.
What are large cap funds?
According to SEBI norms on mutual fund categorization, large cap funds are those that invest minimum 80% of its assets in equity and equity related instruments of large cap companies. Large cap companies are defined as top 100 companies in term of market capitalisation.
Large cap companies are well-established having reliable brand equity, competitive advantage, quality management, strong balance sheet, easy access to various resources, and sustainable business models. Such companies enjoy customer loyalty that enables to generate consistent profits. These factors make them capable of withstanding economic shocks.
Graph 1: Placement of large cap funds on risk-return spectrum
Note: For illustrative purpose only
(Source: PersonalFN Research)
In terms of risk-return parameters, while the returns generated by stocks of these companies may not be very high, they are well capable of containing downside risk during a volatile market environment as compared to smaller-sized peers. Consequently, large cap funds are placed at the lowest end of the risk-return spectrum.
Thus, large-cap funds are suitable if you are looking to earn steady growth of capital over the long term at moderately-high risk level.
Table: Top performing large cap funds based on 5 year returns
Data as on December 28, 2020
(Source: ACE MF)
*Please note, this table only represents the best performing Large Cap Funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.
Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.
Over the last few years, many large cap funds have found it difficult to generate alpha over the benchmark. In fact, a significant number of funds have trailed the benchmark even over the long term. Nonetheless, as seen in the table above, some funds managed to reward investors with superior gains by focusing on quality businesses.
Top large cap funds to invest in
As per PersonalFN, Axis Bluechip Fund, Canara Robeco Bluechip Equity Fund, and Mirae Asset Large Cap Fund are currently the best schemes in the large cap funds segment. These schemes have rewarded investors in the past with superior returns at a reasonable amount of risk, and also rank high in terms of qualitative parameters.
Some other worthy large cap funds are:
Remember do not pick large cap funds by:
The important factor while selecting any scheme is to evaluate its performance based on quantitative and qualitative parameters.
Here's how you should select a large-cap fund...
(Image by Gerd Altmann from Pixabay )
Quantitative Parameters:
Analyse if the fund has shown consistency in performance across various market periods (bull and bear market phases) as compared to the benchmark and category peers. If the scheme's returns fall lower than the returns of benchmark/peers during a market crash, and if the scheme generates a higher return than benchmark/ peers during a bull run in most of the market phases, it can be termed as a consistent performer.
Then determine whether the fund has rewarded its investors well for the risk taken using risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.
A fund that stands strong risk-reward parameters should rank higher while short listing funds for your portfolio.
Qualitative Parameters
Qualitative parameters are often overlooked though they are a vital aspect in the selection process. It involves determining the quality of the portfolio and the efficiency of fund manager/house.
The fund house should have a fairly long track record and must follow robust investment processes with adequate risk management systems in place.
And since the fund's performance is directly dependent on the ability of its fund manager, check the qualification and experience of the fund manager and the track record of the other schemes managed by him/her.
In addition, the fund's portfolio must be well diversified across stocks/sectors because a concentrated portfolio can expose the investors to higher risk.
Moreover, keep a tab on the churning rate of the securities in the portfolio because a high churning rate can make the portfolio prone to volatility and negatively impact the overall returns of the scheme. Analyse, the portfolio turnover ratio and expense ratio to assess how efficiently the fund controls the churning and limits the expenses.
Yes, we know that the above list is a lot for an average investor to look at. It involves a lot of number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance.
Watch this short video on selecting mutual fund schemes:
At PersonalFN, we select and recommend mutual funds based on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:
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S - Systems and Processes
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M - Market Cycle Performance
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A - Asset Management Style
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R - Risk-Reward Ratios
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T - Performance Track Record
The outlook for large cap funds in 2021:
Amid the rally in index-heavyweights such as Reliance Industries, HDFC Bank, Infosys, ICICI Bank, etc. the Nifty P/E currently trading at 35x as compared to P/E of 25-28x we've seen over the past couple of years. The one-year forward P/E too is trading higher than its long term average. This is a clear indication of markets being in the overvalued zone. Therefore, some consolidation during the year cannot be ruled out.
Graph 2: Nifty 50 P/E valuations seem expensive
Data as on December 28, 2020
(Source: ACE MF, PersonalFN Research)
But if the economic recovery sustains it could support the high valuations.
The net addition of COVID-19 cases in India is receding and once the vaccine for the disease arrives, (possibly in January) most sectors are expected to make a comeback. Pent up demand (including rural demand) is expected to drive economic growth in 2021.
The government is taking measures to boost manufacturing growth through measures like production-linked incentives that can prove to be beneficial companies in capital intensive sectors like automobile, pharmaceuticals, electronics, etc.
But it is important to be cautious about potential risk that could hamper the growth such as:
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Falling urban incomes
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High fiscal deficit
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Concerns regarding financial health of banks
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Geopolitical risks
Therefore, invest in large cap fund that has a well-diversified portfolio of stocks and sectors to mitigate the impact of any potential risk. Before making any investment decision clearly identify your goals, risk profile and investment horizon.
And finally, when you invest in mutual funds opt for Systematic Investment Plans (SIP) mode of investing in mutual funds to lower the volatility, average out the investment cost, and optimise returns through the power of compounding.
PS: If you wish to select worthy mutual fund schemes, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.
Additionally, as a bonus, you get access to PersonalFN's popular Debt mutual fund research service, DebtSelect.
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Warm Regards,
Divya Grover
Research Analyst
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