Looking for the Best Large Cap Funds to Invest in 2020?

The equity market continued to witness higher volatility in 2019 with the deepening of liquidity crisis in NBFCs, weak consumption growth, lower industrial and agricultural output, and global factors such as the US-China trade war.

Has the volatility in equity markets made you wary about your mutual fund investment?

Don't worry.

Looking for the Best Large Cap Funds to Invest in 2020
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If you invest in large cap funds, it can provide the much needed stability to tide over turbulent market conditions.

During the last one year when the S&P BSE Mid-cap index and the S&P BSE Small-cap index were down 0.3% and 5.4% respectively, the frontline index S&P BSE Sensex rose 13.4% while Nifty 50 rose 11.5%.

So if you are looking to grow your wealth in 2020, but at a lower risk, consider adding large cap funds to your portfolio.

What are large-cap funds?

Large-cap funds are equity-oriented mutual funds that invest at least 80% of its assets in equity and equity related instruments of large cap companies. Large caps are the top 100 companies in terms of market capitalisation.

These are the companies which are well-established having reliable brand equity, competitive advantage, quality management, strong balance sheet, and sustainable business models. They have easy access to various resources which makes them less prone to risk in case of economic downturn such as the one we are witnessing currently.

Such stability of operation in the large cap segment is what makes large cap funds suitable for long term goals like retirement, children's future, etc.

Graph: Placement of large cap funds on risk-return spectrum
Placement of large cap funds on risk-return
Note: For illustrative purpose only
(Source: PersonalFN Research)

On risk-return parameters, large cap funds can offer steady growth with lower risk making it safest among equity funds. Large cap funds can provide market-beating returns over the long-term and can arrest the downside risk better compared to their pure mid-cap counterparts and even large & mid-cap peers.

Thus, large-cap funds are suitable if you have a moderately-high risk appetite and investment horizon of at least five years.

Table: Top performing large cap funds based on five year returns

Absolute (%) CAGR (%)
Scheme Name 1 Year 3 Years 5 Years
Mirae Asset Large Cap Fund 15.03 16.12 12.02
Axis Bluechip Fund 21.18 20.71 11.15
Indiabulls Blue Chip Fund 14.52 14.84 10.84
Canara Rob Bluechip Equity Fund 18.94 16.60 10.16
Invesco India Largecap Fund 12.93 13.78 10.00
SBI BlueChip Fund 13.98 11.60 9.95
Essel Large Cap Equity Fund 14.39 12.52 9.86
BNP Paribas Large Cap Fund 20.69 15.44 9.82
Kotak Bluechip Fund 17.09 13.60 9.53
Edelweiss Large Cap Fund 13.82 14.92 9.31
NIFTY 50 - TRI 13.98 15.06 8.27
Data as on December 06, 2019
(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.

Many schemes managed to beat the Nifty 50 index over the 1-year, 3-year and 5-year period. Some of the best schemes in the segment as per PersonalFN are Mirae Asset Large Cap Fund, Axis Bluechip Fund, and Canara Rob Bluechip Equity Fund. These schemes have rewarded investors in the past with superior returns at a reasonable amount of risk.

Some other worthy schemes are:

All these schemes have managed to beat the benchmark and many category peers over longer time frames.

But keep in mind that the past performance is not indicative of future returns. Hence, if you invest in top performing schemes of 2019 anticipating that they will be top performers in 2020, you may be disappointed.

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:

  1. Performance and risk analysis

    Analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns.

    Under this, you need to rank the fund based on quantitative parameters like rolling returns across short-term and long-term periods, such as a 1-year, 3-year, and 5-year timeframe, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

  2. Performance across market cycles

    You need to ensure that the fund has the ability to perform consistently well across multiple market cycles. Therefore, compare the performance of all the available large-cap funds vis-a-vis their benchmark index as well as category peers across bull phases and bear market phases.

A fund that performs well on both sides of the market should rank higher on the list.

Qualitative Parameters

  • Portfolio Quality

    Adequate Diversification - The scheme should not hold a highly concentrated portfolio. It should have a well-diversified portfolio and the exposure to the top-10 holdings should be ideally under 50%.

    Low Churn - Engaging in high churning can result in higher cost impacting the overall return of the scheme. Therefore, you also need to consider the portfolio turnover ratio and expenses, and penalise funds involved in high churning, i.e. those funds with a turnover ratio of more than 100%.

  • Quality of Fund Management

    You must consider the fund manager's experience, workload, and the consistency of the fund house. Therefore, assess the following criteria:

    The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade.

    The number of schemes managed - A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is burdened with the task of managing 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 - Research about the fund house's performance across schemes; find out if only a few selected schemes are doing well. A fund house that performs well across the board is an indication of sound investment processes and risk management techniques 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 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:

 

We, at PersonalFN, select and recommend mutual funds on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:

  • S - Systems and Processes

  • M - Market Cycle Performance

  • A - Asset Management Style

  • R - Risk-Reward Ratios

  • T - Performance Track Record

The outlook for large cap funds in 2020:

As investors flocked to some of the quality names in the large cap segment due to the turbulence in the equity market, the valuation in the large cap space has reached a high point. This means that growth in mutual funds with high exposure to such stocks could be limited. Moreover, if these stocks come under pressure, it could have huge bearing on the returns.

Graph: Large caps trading at high valuations
Data as on December 06, 2019
(Source: nseindia.com)

On the other hand, some of the large cap stocks especially in the auto and mining & metal segment were beaten down. This implies that even large caps are not completely safe from economic downturn. As the economy recovers, these stocks could see upside again and fund managers could benefit from picking some of these stocks available at lower valuations and scaling down exposure to some of the overvalued stocks.

Besides, there have been some instances of corporate governance issues in some of these big names.  If such instances happen repeatedly, even in some of India's largest companies, they might soon lose their premium valuations.

It is difficult to ascertain whether the rally in large caps will sustain in the coming year given the difficulties the economy is facing. Thus, it makes sense to diversify your portfolio across market caps to reap the maximum benefit of changing market condition.

While large caps are a good low-risk bet for your future goals, as an investor you need to be very careful while selecting funds to invest in. Avoid schemes that have a very high exposure to a particular stock or sector. 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 (SIPs) mode of investing in mutual funds to lower the volatility and benefit from the power of compounding of wealth.

Editor's Note: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

PersonalFN's mutual fund recommendations tend to beat the market by a significant margin over long time periods. FundSelect has beaten the market by over 70% in a decade.

Each fund recommended under  FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

Every month,PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Author: Divya Grover