By now, it is well-known that actively-managed large-cap equity funds have in the recent past struggled to beat their benchmarks such as the Nifty 100 and BSE 100. The mandate to buy stocks from the 100 biggest companies is perhaps simple, but beating the index has been tough. In fact, about half of the large-cap funds have not beaten their benchmark return in 3-year and 5-year periods.
Can focused equity funds be a replacement for the large-cap fund laggards in your portfolio? This theory gains ground because category-focused funds, which can’t invest in more than 30 company stocks but have the flexibility to invest in companies of all sizes, have chosen to keep two-thirds of assets in large-cap stocks. So, in effect, many focused equity funds are somewhat like largecap funds. Here is a lowdown.
Fund mandates
As per SEBI norms, large-cap funds should have a minimum 80 per cent of total assets in large-cap stocks. As a category, large-cap funds have 85 per cent of their money in large-caps, 8 per cent in midcaps, 1 per cent in small-caps, and the rest in others as of May-2023 end. Most large-cap funds do not run concentrated portfolios with 30-50 stocks being the norm.
Also read: Markets near all-time high: Why invest in SBI Large & Midcap Fund?
In comparison, focused funds have more leeway, and are benchmarked to the BSE 500 or Nifty 500. A scheme focused maximum 30 stocks and minimum investment 65 per cent of total assets can be a focused fund. As a category, focused funds despite the freedom have allocated 66 per cent to large-cap stocks, 18 per cent to midcaps, 5 per cent in small-caps, and the rest in others. Focused funds run more concentrated portfolios than pure-play large-cap funds, with the number of stocks in individual portfolios mostly being in 25-30 range. Quant Focused runs a 17-18 stock portfolio.
Importantly, with two-thirds of portfolio in largecaps, focused funds as a category have as much largecap exposure as do flexicap fund category (68 per cent), and more than what multicap funds (41 per cent) and large & midcap funds (51 per cent) have. In fact, nine focused funds viz. ABSL Focused Equity, Axis Focused 25, HDFC Focused 30, HSBC Focused, ICICI Pru Focused Equity, IDBI Focused 30, Mahindra Manulife Focused, Motilal Oswal Focused and Tata Focused Equity, have consistently maintained about 75 per cent or more in largecap stocks consistenly over quite a period of time.
Return matrix
As a category, returns of focused funds have edged out actively-managed large-cap funds in the 1-, 3- and 5-year time periods. Since focused funds run more concentrated portfolios than large-cap funds, polarisation at the market and sector level can help them during such times. Investors come to focused funds to participate in equities through a focused portfolio consisting of high conviction bets and diversified exposure across market cap.
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.