Active large-cap funds outperform benchmarks as rally gets broad-based

Average one-year return at 48% versus Sensex's 45% gain

Actively-managed large cap funds have started delivering higher returns than passive funds on the back of broad-based rally in Indian equity markets. During the past one-year, the average returns for the equity large-cap category is around 48 per cent compared to Sensex gains of 45 per cent.

Several large-cap funds, particularly bluechip funds, have managed to give returns in the range of 50-60 per cent the past one year, shows the data from Value Research.

Market participants say that in the past one year, the surge in the equity market was broad-based and not confined to a few stocks, which has helped active large-cap funds outperform their benchmarks.

Between 2017 and 2019, several fund managers had struggled to generate alpha amid a concentrated rally, prompting investors to opt for the relative-low cost passive offerings. However, given this year’s all-encompassing gains have fund managers have been able to display their stock picking skills.

Krishna Sanghavi CIO–Equity at Mahindra Manulife MF says, “The broader economy is expected to do well post-Covid, with support from policy actions, fiscal expansion, PLI scheme, and easy monetary policy. The growth in the economy usually translates to equity markets by way of broader markets faring well. So, in a growth expectations environment active funds perform better than passive funds.”

In the last one-year Quant Focused Fund has given returns of 70.19 per cent, followed by Franklin Bluechip fund which delivered returns of 64.31 per cent.

Even equal-weighted funds have managed to give better returns compared to Nifty or Sensex, underscoring the across-the-board gains. Market participants also say that small exposure towards mid and small cap stocks have also helped largecap funds generate higher returns.

In the last one-year BSE Midcap index is up by around 74.21 per cent, while BSE Small cap index has zoomed by 101 per cent.

Arun Kumar, Head of Research, FundsIndia says, “Largecap funds are mandated to invest at least 80 per cent of assets in largecap stocks, while remaining can be invested in mid and small cap stocks. In the last one year, mid and small cap stocks have given better returns compared to largecap stocks and this has also helped the active largecap funds.”

However, given the sharp run-up in the mid and small cap segment, market participants believed that at current valuations largecap looks more attractive.

“Mid and small cap stocks are usually the bigger beneficiaries of easy monetary policy and they have done well in the last one year. Having said that, post the sharp rally in small and mid-caps in the past one year, the valuation of large cap looks relatively attractive compared to mid and small cap segment,” added Sanghavi.