75% of Active Large Cap Funds outperformed the Index for a year period. Hence, is it time to move to active large-cap funds from passive large-cap funds?
In the financial world, the debate between active and passive investing is ongoing. Supporters of active funds celebrate when they outperform the benchmark, while the opposite is true when they underperform. Despite this, many large-cap funds have been facing challenges in beating the benchmark, especially after SEBI Recategorization. Surprisingly, when looking at the returns from last year, approximately 75% of active large-cap funds managed to outperform the index.
Let’s take a moment to delve into the meaning of large-cap as defined by SEBI before we dive into the remarkable performance of active large-cap funds. According to SEBI, large-cap funds are required to invest a minimum of 80% of their total assets in equity and equity-related instruments of large cap companies. As for the remaining 20%, the fund manager has the flexibility to invest in stocks of any market cap. Now, with this understanding, we can explore the reasons behind the impressive performance of these funds.
The list of all active large-cap funds with their last one-year performance compared to the benchmark (Nifty 100 TRI) is as below.
| Funds | 1 Yr Index Return (Nifty 100 TRI) % | 1 Yr Fund Returns % | Alpha % | Expense Ratio (%) | Launch |
| Aditya Birla Sun Life Frontline Equity Fund – Direct Plan | 32.9 | 33.47 | 0.57 | 1.01 | 2013-01-01 |
| Axis Bluechip Fund – Direct Plan | 32.9 | 30.4 | -2.5 | 0.66 | 2013-01-01 |
| Bandhan Large Cap Fund – Direct Plan | 32.9 | 40.09 | 7.19 | 0.89 | 2013-01-01 |
| Bank of India Bluechip Fund – Direct Plan | 32.9 | 46.82 | 13.92 | 1.35 | 2021-06-29 |
| Baroda BNP Paribas Large Cap Fund – Direct Plan | 32.9 | 40.73 | 7.83 | 0.91 | 2013-01-01 |
| Canara Robeco Bluechip Equity Fund – Direct Plan | 32.9 | 33.36 | 0.46 | 0.52 | 2013-01-02 |
| DSP Top 100 Equity Fund – Direct Plan | 32.9 | 36.14 | 3.24 | 1.18 | 2013-01-01 |
| Edelweiss Large Cap Fund – Direct Plan | 32.9 | 35.59 | 2.69 | 0.78 | 2013-01-01 |
| Franklin India Bluechip Fund – Direct Plan | 32.9 | 32.46 | -0.44 | 1.1 | 2013-01-01 |
| Groww Large Cap Fund – Direct Plan | 32.9 | 36.01 | 3.11 | 1.06 | 2013-01-01 |
| HDFC Top 100 Fund – Direct Plan | 32.9 | 39.48 | 6.58 | 1.07 | 2013-01-01 |
| HSBC Large Cap Fund – Direct Plan | 32.9 | 36.02 | 3.12 | 1.21 | 2013-01-01 |
| ICICI Prudential Bluechip Fund – Direct Plan | 32.9 | 41.7 | 8.8 | 0.92 | 2013-01-01 |
| Invesco India Largecap Fund – Direct Plan | 32.9 | 39.89 | 6.99 | 0.78 | 2013-01-01 |
| ITI Large Cap Fund – Direct Plan | 32.9 | 41.21 | 8.31 | 0.44 | 2020-12-24 |
| JM Large Cap Fund – Direct Plan | 32.9 | 44.11 | 11.21 | 0.89 | 2013-01-01 |
| Kotak Bluechip Fund – Direct Plan | 32.9 | 33.17 | 0.27 | 0.59 | 2013-01-01 |
| LIC MF Large Cap Fund – Direct Plan | 32.9 | 27.94 | -4.96 | 0.75 | 2013-01-01 |
| Mahindra Manulife Large Cap Fund – Direct Plan | 32.9 | 35.62 | 2.72 | 0.73 | 2019-03-15 |
| Mirae Asset Large Cap Fund – Direct Plan | 32.9 | 26.88 | -6.02 | 0.54 | 2013-01-01 |
| Nippon India Large Cap Fund – Direct Plan | 32.9 | 43.6 | 10.7 | 0.79 | 2013-01-01 |
| PGIM India Large Cap Fund – Direct Plan | 32.9 | 27.33 | -5.57 | 0.86 | 2013-01-01 |
| Quant Large Cap Fund – Direct Plan | 32.9 | 54.85 | 21.95 | 0.66 | 2022-08-08 |
| SBI Bluechip Fund – Direct Plan | 32.9 | 27.94 | -4.96 | 0.86 | 2013-01-01 |
| Sundaram Large Cap Fund – Direct Plan | 32.9 | 34.18 | 1.28 | 0.62 | 2013-01-01 |
| Tata Large Cap Fund – Direct Plan | 32.9 | 34.97 | 2.07 | 1.14 | 2013-01-01 |
| Taurus Large Cap Fund – Direct Plan | 32.9 | 41.42 | 8.52 | 2.54 | 2013-01-01 |
| Union Largecap Fund – Direct Plan | 32.9 | 35.52 | 2.62 | 1.9 | 2017-05-11 |
| UTI Large Cap Fund – Direct Plan | 32.9 | 30.03 | -2.87 | 0.85 | 2013-01-01 |
| WhiteOak Capital Large Cap Fund – Direct Plan | 32.9 | 37.89 | 4.99 | 0.72 | 2022-12-01 |
Out of the bunch, the standout star is undoubtedly the Quant Large Cap Fund, which has managed to generate a staggering 22% higher returns than the benchmark. Following closely behind is the Bank Of India Bluechip Fund, which boasts an impressive 14% more returns than the benchmark. Last but not least, we have the JM Large Cap Fund, which has outperformed the benchmark by a commendable 11%. These funds have truly proven their worth in the market.
As previously stated, it is important to note that large-cap funds are required to allocate approximately 80% of their investments to large-cap stocks, while the remaining 20% is at the discretion of the fund managers. With that in mind, let’s delve into a comparison of the returns from the past year for Nifty 100 TRI, Nifty Midcap 150 Index TRI, and Nifty Small Cap 100 TRI.
The Nifty 100 TRI saw a 32.90% return over 1 year, while the Nifty Midcap 150 Index TRI had an impressive 52% return, and the Nifty Small Cap 100 TRI outperformed them all with a 62% return. If ABC fund invested 80% in Nifty 100 and 20% in Nifty Midcap 150, the fund could have potentially generated a 4% alpha over the Nifty 100 TRI thanks to the outstanding performance of the Midcap index!
Imagine if the ABC fund decided to invest 80% in Nifty 100 and the remaining 20% in Nifty Small Cap. In that case, the fund could have potentially achieved a 6% alpha over the Nifty 100 TRI!
Let’s consider another crucial aspect regarding the SEBI definition of a large-cap fund. According to this definition, the fund is required to invest approximately 80% of its assets in large-cap stocks. However, it is important to note that this ratio needs to be maintained as an average over the course of a year, rather than strictly on a daily or monthly basis (based on my understanding). If you have a different perspective on this matter, please feel free to share it with me, as the SEBI definition can be somewhat unclear. Consequently, some funds may take advantage of this flexibility by temporarily increasing their exposure to mid-cap and small-cap stocks for a few days, and then readjusting their portfolio to maintain an average of 80% exposure to large-cap stocks.
The point I am making here and stressing by mentioning the allocation to mid and small in their portfolio is that the outperformance is mainly attributed to the fantastic performance of mid and small cap sectors but NOT because of fund manager SKILL. In a small portion, SKILL of managing the average 80% in large cap and choosing the right stocks among mid and small-cap space can be attributed.
Instead of celebrating the success of the active large-cap fund, I prefer to stick with passive funds. But if you’re willing to take on the risk of potential underperformance by active fund managers in the future, then active funds may be the way to go.
Wrapping up this post with a thought-provoking quote from Michael Mauboussin’s “The Paradox of Skill” – In highly competitive environments where experts face off, it’s not always skill that distinguishes the best from the rest, but rather pure luck.
