The relevance of large-cap mutual fund schemes has come into question due to difficulties in outperforming the benchmark index. Their underperformance has been created when bluechip stocks have generally outperformed small and mid-cap stocks.
According to financial advisors, it would be better to invest in index funds based on the performance of Nifty or Sensex made of large-cap shares rather than large-cap schemes.
According to data from Accord Fintech, large cap funds have outperformed their benchmark indices Sensex and Nifty over three and five year periods.
In a three-year period, only 4 large-cap funds with active management out of 27 have been able to outperform the benchmark index and only 6 funds have been able to outperform in the five-year period. Their performance has been very good in the last one year and 20 out of 28 have managed to outperform their benchmark.
Harshvardhan Rungta, financial plan of Roongta Securities, said, “It has become difficult for large cap funds to outperform the Nifty.” Due to the underperformance of large cap schemes against the benchmark, many financial planners are advising investors to invest in index funds under large cap portfolio allocation.
Many fund managers end up running their schemes according to the benchmark. Therefore, wealth managers feel that it would be better to build a large-cap portfolio through cheap index funds.
“The cost of an index fund is low and there is no cash in the portfolio and there is no such thing as a particular choice of fund manager,” says Roongta. According to a study by Sanctum Wealth Management, 65 to 83% of the stocks in the portfolio of 16 large-cap equity mutual fund schemes with active management are Nifty 50.
The biggest advantage of an index fund is that its cost is very low because they are not actively managed by a fund manager.
The regular fund’s index fund costs 17 basis points annually. In comparison, the management fees of equity funds with active management can range from 150-225 basis points.
As far as exchange traded funds (ETFs) are concerned, they have an expenditure of 5-10 basis points. In the opinion of some financial planners, considering the flexibility a fund manager can get, active investors should choose multi-cap funds or focused funds that offer better returns than large-cap funds.
Deepak Chhabria, director, Exim Financial Services, says, “Investors who are risk-averse can invest in index funds and those who can take the risk can invest in large-cap funds through focused funds.”
