Large-Cap Funds – Majority of large cap funds lagged indices for third year in a row

largecap Large Cap Funds   Majority of large cap funds lagged indices for third year in a row

For the year 2020, once again, the majority of the large-cap funds underperformed the benchmark indices. This is a repeat of what we saw in 2018 and 2019 when the volatility in the market had led to the large-cap funds not measuring up.

Repeat story in 2020

According to a recent survey of mutual fund performance, nearly 81% of the large-cap funds have given returns that are lower than the benchmark indices on a TRI basis. This is almost like the last two years; 2018 and 2019. In both the years, the large-cap funds had given low performance and at that time it was blamed on volatility. In 2020, large-cap funds gained smartly from the bounce since March, but despite that, the overall performance was below the index. That has had negative repercussions on the investor flows into equity funds.

Big outflows from Equity Funds

Between July 2020 and February 2021, equity funds saw outflows to the tune of over Rs.65,000 crore. While sector and mid-cap funds had seen bouts of flows, in the case of large-cap funds it was consistent outflows all through. March 2021 has been an exception in terms of inflows into equity funds but even that was driven by sector funds and ELSS as large-cap fund flow stayed tepid. This weak large-cap show has been one reason we find so many retail investors getting wary of equity fund investing.

Kurtosis, oh really?

One reason given for this large-cap fund underperformance is kurtosis. It means that; within large caps, positive returns are concentrated in a handful of stocks like Reliance, TCS, Infosys, HUL, ICICI Bank, etc. Since funds are limited to not owning more than 10% in one stock, it becomes a limitation to create a concentrated portfolio that can beat the market. That may not explain the full story. While 81% of the large-cap funds underperformed in 2020, even over a 5-year period 66% of large-cap funds did worse than the index. Surely, it is not kurtosis alone if you lag by 3%. What does this mean for MF investors?

Take a different approach

The global experience is that large-cap fund managers do struggle to beat the indices. If you are using mutual funds to achieve your financial goals, remember that large-cap funds are about access to Nifty stocks and not about beating the index. You must give a lot of importance to reducing costs. You can go for direct plans or even focus on index funds. One of the downside risks of such analysis is that they are done on a point-to-point return basis. In reality, most investors access equity funds via the SIP approach and in such cases rupee cost averaging would have anyways helped you do better. It is time to stop looking at large-cap funds as alpha generators and look at it as a part of your long-term plan!

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