Mutual flavour shifts from mid-cap to large-cap

After having amassed enormous returns riding on the midcap rally in the past year, domestic mutual funds seems to have become cautious.

Fund managers confirmed that shifting focus to large-caps as valuations in mid-caps still looks expensive and they are vulnerable to earnings disappointments.

In fact, many fund houses are launching large-cap funds which invest only in the fundamentally strong companies with large market capitalization.

Apart from Birla Sunlife Mutual fund which launched its Birla Top 100 fund towards the end of August, the Principal PNB Mutual fund has recently launched a large cap fund - Principal Large-cap Fund - which will predominantly invest in stocks having a market capitalization of more than Rs 3500 crore.

Rajat K Jain, chief investment officer, Principal PNB Mutual, said: "The small-caps and mid-caps are overstretched and there is a need for risk-averse investments. A large number of small-cap companies have limited growth and the risk they hold is immense. One should restrict these scrips to a small part of the portfolio."

Though the large caps have not given staggering returns as that of the mid-caps in the past couple of years, they hold value for the long term investor.

According to an equity analyst with a mutual fund house, "The large-cap companies with strong balance-sheets have the potential to raise or borrow large amount of capital, both from the domestic as well as the international market. Also these companies benefit from cost-efficiency, leading to better topline and bottomline growth."

The existing large cap funds have posted good returns in the past one year. The leaders in this segment were the Kotak 30 Fund, Prudential ICICI Growth Plan and HDFC Top 200, all posting excellent returns above 60 per cent.
 

HOT PICKS Returns in % as on September 21, 2005
Scheme Name	3 mth	6 mth	1 yr
Kotak 30	31.67	32.25	65.99
Pru ICICI Growth Plan - Cumulative	24.74	26.90	63.70
HDFC Top 200	21.50	27.66	61.50
Alliance Frontline Equit y Fund	22.80	27.06	57.40
Chola Growth Fund -Growth	18.84	25.83	55.47
HSBC Equity Fund	27.90	26.21	55.11
Franklin India Bluechip	24.77	27.79	53.57
PRINCIPAL Equity Fund	21.99	25.58	53.57
UTI Thematic Large Cap Fund	21.92	23.89	53.05
DSP ML Top 100 Equity Fund	21.67	25.52	52.84

According to Anand Shah, equity manager, Kotak Mutual fund, "We have adhered to our portfolio with higher exposure to scrips like L&T, SBI and Bharti without making too many changes. This has payed off."

"There are a large number of bluechips which have a long way to go. Unlike the US, where the topline companies grow at 3-4 per cent, we are in a situation where the large-cap companies are nowhere near their full potential. these stocks can give impressive risk-adjusted returns for at least the next five years" he added.