Looking for the Best Large & Midcap Funds of 2019? Find Out Here…

Are you worried seeing mid and small-cap funds in your portfolio losing value month after month?

Does the sluggish performance of large-cap funds you have invested in frustrate you?

It's a time to consider the best of both worlds---Large & Mid-cap Funds.

As per SEBI's categorisation norms, an equity-oriented mutual fund scheme is characterised as a large & mid-cap one only if it invests at least 35% of its total corpus each in equity & equity related instruments of large-cap stocks and simultaneously maintains minimum 35% allocation to mid-cap stocks (i.e. companies from 101st to 250th on full market capitalisation basis). The remaining portion is parked in debt & money market instrument.

Graph 1: Large-and-mid-cap Funds: How are they placed on the risk-return spectrum

Note: for illustrative purpose only
(Source: PersonalFN Research)

On the risk-return spectrum, a Large & Mid-cap-Fund is considered to be the safest among equity funds after the large-cap funds. If you are looking for an equity-oriented mutual fund category which will offer you higher returns without compromising much on the risk, Large & Mid-cap Funds are for you.

Aggressive investors, too, can consider investing in a Large & Mid-cap Funds from a diversification point of view. Given the topsy-turvy market conditions, you may not want to go overboard with a pure mid-cap fund or small-cap oriented funds. Nor would you like to bet excessively on focused funds that hold a concentrated portfolio.

When you plan for long-term goals and want the stability of large-caps along with the agility of mid-caps in the journey of wealth creation and accomplishing financial goals; a Large & Mid-cap fund could be a suitable alternative.

Large & Mid-cap-Funds can form a part of your core equity mutual fund portfolio.

PersonalFN's research believes core holdings should account for 60% of your mutual fund portfolio and the rest 40% shall consist of satellite holdings.

While the 'Core' part of your portfolio focuses on the stable schemes with a long-term view and the 'Satellite' part revolves around capitalising on short-term opportunities, the combination helps you generate superior returns without taking excessive risks.

[Read: A Portfolio Strategy That Could Help You Reduce Shocks Of The Equity Market]

Which are the best performing Large & Mid-cap Funds?

Table 1: Report Card - Performance of Large & Mid-cap Funds in 2018 and over long time frames

Scheme Name Returns (Absolute %) Returns (CAGR %)
29/Dec/17 To 31/Dec/18 3-year 5-year
Sundaram Large and Mid Cap Fund 1.7 17.2 18.5
Invesco India Growth Opp Fund 1.2 18.9 18.5
Edelweiss Large & Mid Cap Fund -2.1 15.6 16.6
LIC MF Large & Midcap Fund -3.4 19.3
HDFC Growth Opp Fund -3.7 12.8 9.3
IDFC Core Equity Fund -3.8 17.3 14.9
Tata Large & Mid Cap Fund -3.9 14.7 16.6
Franklin India Equity Advantage Fund -4.3 12.2 16.1
SBI Large & Midcap Fund -4.4 15.3 17.6
Kotak Equity Opp Fund -4.5 17.5 18.4
NIFTY 200 - TRI 0.3 17.2 14.8
Data as on February 11, 2019
(Source: ACE MF)

*Please note, this table only represents the best performing Large & Midcap 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.

In 2018, only 2 out of 23 Large & Mid-cap Funds generated positive returns and managed to outperform the Nifty 200 Total Return Index (TRI). This would at the outset discourage you completely or attract your attention to only Sundaram Large and Mid Cap Fund and Invesco India Growth Opportunities Fund.

However, if you look at the returns data over longer time frames, say 3 and 5 years (which is a wise thing to do), you would be awestruck by the double-digit compounded annualised returns clocked by some in the category.

Principal Emerging Bluechip Fund, ICICI Prudential Large & Mid Cap Fund, L&T Large and Midcap Fund, Invesco India Growth Opportunities Fund, and Mirae Asset Emerging Bluechip Fund, in particular, worthy schemes in the category. All these have shown impressive performance at lower volatility and adequately compensated its investors in the past.

The other decent performers are:

Franklin India Equity Advantage Fund

Canara Robeco Emerging Equities Fund

DSP Equity Opportunities Fund; and

IDFC Core Equity Fund

These schemes have managed to outperform their respective benchmark indices over longer time frames and across market cycles, outperforming the category average return.

But do keep in mind: past performance is not indicative of future returns. Hence, if you are investing in top-performing schemes of the past, anticipating that they will be top performers of 2019, you may be proved wrong.

If you're looking at the best equity mutual funds that you could invest in 2019 right away, here is PersonalFN's special premium report: Top 5 Equity Funds to Invest In 2019.

This report tells you about five worthy, high growth potential equity schemes that can be instrumental in building significant wealth over the next 5-7 years.

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Do note that in 2018, only a handful of index stocks drove Nifty 200 higher. At a time, when the majority of index constituents are generating lacklustre returns, it's difficult for any mutual fund house to outperform. Superior performance coming through a concentrated portfolio might expose investors to excessive risk in future, should the outperforming stocks retreat.

Thus, prudently selecting a Large & Mid-cap Fund will be extremely crucial.

The outlook and strategy for 2019:

Please remember, 2019 being an election year in India, it will be a year of high drama and high (market) volatility. Plus, with uncertainty looming on the global landscape, and the possibility of a global recession as per Nobel laureate, Paul Krugman; going overboard on mid and small-cap funds may prove to be detrimental. Plus, if the anticipated earnings recovery doesn't materialise, mid and small caps may underperform and valuations wise may look expensive.

Relying only on large-cap funds might save you from volatile markets to an extent, but in case markets take a U-turn and rise sharply, large-cap funds might underperform their mid and small-cap peers.

Thus, investing in Large & Mid-cap Funds in 2019 makes a lot of sense.

How to pick the best Large & Mid-cap Funds for 2019?

(Image source: pixabay.com)

To identify the best Large & Mid-cap Funds, avoid relying excessively on past performance. It has become a less relevant indicator after mutual fund schemes reshuffled their portfolios significantly to adhere to SEBI's reclassification guidelines.

Therefore, to select a winning Large & Mid-cap Fund, adopt a combination of quantitative and qualitative criteria.

Quantitative criteria:

  1. Performance and risk analysis

    This parameter analyses the fund's consistency in performance across various market periods with decent risk-adjusted returns. The fund should be ranked on quantitative parameters like rolling returns across short-term and long-term durations, such as 1-year, 3-year, and 5-year periods, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

  2. Performance across market cycles

    To ensure that the fund can perform consistently across multiple market cycles, compare the performance of the schemes vis-a-vis their benchmark index across bull and bear market phases. A fund that performs well on both sides of the market should rank higher on the list.

Qualitative Parameters:

  1. Portfolio Quality

    The portfolio quality of a mutual fund scheme points at how it is likely to perform in the future. Here's what you should pay attention to:

    Adequate Diversification - The fund should not hold a highly concentrated portfolio. A concentrated portfolio heightens the risk involved. Hence, the portfolio of a fund should be well-diversified and the exposure to the top-10 stocks should be ideally under 50% while concentration to one particular sector should not exceed 30-35%.

    Low Churn - Engaging in high churning of your portfolio can result in trading and high turnover cost. Therefore, you also need to consider the portfolio turnover ratio and expenses and penalise funds involved in very high churning.

  2. Quality of Fund Management

    Further, consider the fund manager's experience, his workload, consistency in clocking returns, and proportion of the AUM (Assets Under Management) of the fund house that are actually performing. Therefore, check the following points before investing:

    The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade. But note that experience isn't always enough. Some schemes managed by fund managers with 15-20 years of experience haven't necessarily done consistently well for a long time.

    The number of schemes managed - A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is not loaded with a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.

    The efficiency of the fund house in managing your money - You need to check if most of the schemes from the fund house are doing consistently well or a handful of them. A fund house that performs well across the board is an indication that sound investment processes and risk management techniques are in place.

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 accessible. 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:

PersonalFN adopts comprehensive mutual fund research process to select the best mutual  funds. Based on a composite score, which has a weightage to each parameter, a view on each fund recommended under various mutual fund research services is provided.

Once you select a worthy Large & Mid-cap Fund/s for your portfolio start in investing in them preferably through Systematic Investment Plans (SIPs) and make sure you have an investment time horizon of at least 5-7 years. With SIP you will be able to mitigate the risk involved better vide the benefit of rupee-cost averaging. And finally, choose direct plans over a Regular Plan to invest.

[Read: Best SIPs To Invest in 2019]

Also, please remember this when you invest in mutual funds

  • Clearly identify your financial goals.

  • Recognise the financial goals you wish to achieve and align your mutual fund investment to them.

  • Gauge the time horizon before the financial goals befall.

  • Assess your risk appetite. Only if you have a high-risk appetite and longer time horizon (at least 3-5 years) for the fulfilment of goals, invest more in equity-oriented mutual funds; otherwise, stick to debt mutual funds and other fixed-income investments.

  • Based on your risk appetite, draw up a personalised asset allocation chart and invest accordingly.

  • And last but not the least, keep reviewing your investment so as to ensure you're on track to accomplishing your envisioned financial goals.

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Happy Investing!

Author: PersonalFN Content & Research Team