Active large-cap funds outperform benchmarks on back of broad rally

Delivering higher returns than passive funds on the back of broad-based rally in Indian equity markets

Actively managed large-cap funds have started delivering higher returns in the past one year, against passive funds. On average, large-cap funds have given returns of 28.27 per cent, against 22.17 per cent returns generated by the S&P BSE Sensex in the past year.

Market participants say the outperformance is largely due to a broad-based rally in Indian equities in the past few months. Several active large-cap funds have managed to give returns in the range of 35-45 per cent in one year, reveals the data from Value Research.

G Pradeepkumar, chief executive officer, Union Asset Management Company, says, “Underperformance of active funds was a short-term phenomenon. Whenever there is a concentrated rally, few stocks and sectors do well. But in the past few months, the rally across markets has been helping fund managers.”   

In the period between 2017 and 2019, many large-cap funds had underperformed the markets since the rally was very concentrated, leading to investors gravitating towards passive funds.  

Among active funds, Quant Focused Fund has given returns of 45.82 per cent, while Invesco India Largecap Fund and Tata Largecap Fund have given returns of 37.66 per cent and 36.31, respectively, in the past one year. The returns are of direct plans.

Krishna Sanghavi, chief investment officer–equity at Mahindra Manulife Mutual Fund, says, “When the economy grows, a large number of sectors do well. The growth in the economy usually percolates through equity markets by way of broader markets faring well. As long as India’s nominal gross domestic product grows in the range of 10-12 per cent, there is a high probability that active funds will continue to do well.”

Apart from active large-cap funds, passive funds, such as Bharat 22 exchange-traded funds, funds tracking Value 20 Index, and Equal Nifty funds, have also done well, compared to the Sensex.

Market participants say these trends indicate the rally has been across sectors in the large-cap stocks, and value stocks have also been performing well lately.

In the past one year, apart from Sensex, the MidCap Index and the SmallCap Index have given returns of 37.2 per cent and 59.39 per cent, respectively, in the past year.

“Currently, large-caps are looking attractive since mid- and small-cap stocks have been posting very high returns in the past 18 months, appearing rich in valuation. Having said that, for large-caps, continuous selling from foreign investors is a challenge,” said Sanghavi.