The recent correction in the Nifty 50 valuations of large-cap stocks is reasonable and in line with long-term averages. Should investors consider actively managed large-cap funds or their passive index counterparts for their bluechip allocations?
HOW ARE LARGE-CAP FUNDS DEFINED IN THE MUTUAL FUND SPACE?
As per regulatory guidelines, a large-cap company is a listed company which is ranked from 1st to 100th on the Indian stock exchanges in terms of market capitalisation. Large-cap funds are available in both the active and passive space for investors. In the case of a mutual fund house, an actively managed large-cap fund is one which invests at least 80%of its assets in such companies, with the flexibility to invest the balance 20% in other companies as per the discretion of the fund manager. In the case of passive large-cap funds, they are plain vanilla funds based on the indices such as BSE Sensex, Nifty 50, Nifty Next 50 and Nifty 100, which mimic the respective indices and give you exposure to large-cap stocks.
WHAT IS THE DIFFERENCE BETWEEN AN ACTIVE AND PASSIVE LARGECAP FUND?
A passive fund merely mimics its underlying index, and there is no fund manager bias. In an active fund, the manager can choose stocks and build a portfolio in line with his view of the equity markets. The major difference between the two funds is that of cost. While passive funds could cost anywhere between 5 basis points to 50 basis points for a direct plan, active funds could cost 50-125 basis points.
WHY ARE LARGE-CAP FUNDS BEING RECOMMENDED NOW BY ANALYSTS ?
The PE (price to earnings) multiple of the Nifty 50 stands at 21, close to its historical long-term averages. In an environment of global uncertainty with tariff wars looming whose impact is unknown, analysts believe it is safer to be with large companies. These companies have experienced promoters, strong balance sheets and access to talent and resources due to their being in business for a longer time. These companies are tracked by both Indian institutional as well as foreign investors and hence there is higher transparency and availability of reports on the performance and outlook of these companies. From a stock market perspective, such companies are more stable and there is visibility of earnings and longevity of such companies compared to their smaller counterparts.
HOW DO YOU ALLOCATE TO A LARGE-CAP FUND?
Based on their cash flows investors can make a lumpsum or staggered allocation to large-cap funds. Investors could split it between an active and passive fund. Investors, who are moving from fixed deposits or new to stocks and mutual funds, and are not comfortable with volatility, should start with large-cap funds. Conservative investors can own only large-cap oriented funds.
HOW ARE LARGE-CAP FUNDS DEFINED IN THE MUTUAL FUND SPACE?
As per regulatory guidelines, a large-cap company is a listed company which is ranked from 1st to 100th on the Indian stock exchanges in terms of market capitalisation. Large-cap funds are available in both the active and passive space for investors. In the case of a mutual fund house, an actively managed large-cap fund is one which invests at least 80%of its assets in such companies, with the flexibility to invest the balance 20% in other companies as per the discretion of the fund manager. In the case of passive large-cap funds, they are plain vanilla funds based on the indices such as BSE Sensex, Nifty 50, Nifty Next 50 and Nifty 100, which mimic the respective indices and give you exposure to large-cap stocks.
WHAT IS THE DIFFERENCE BETWEEN AN ACTIVE AND PASSIVE LARGECAP FUND?
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WHY ARE LARGE-CAP FUNDS BEING RECOMMENDED NOW BY ANALYSTS ?
The PE (price to earnings) multiple of the Nifty 50 stands at 21, close to its historical long-term averages. In an environment of global uncertainty with tariff wars looming whose impact is unknown, analysts believe it is safer to be with large companies. These companies have experienced promoters, strong balance sheets and access to talent and resources due to their being in business for a longer time. These companies are tracked by both Indian institutional as well as foreign investors and hence there is higher transparency and availability of reports on the performance and outlook of these companies. From a stock market perspective, such companies are more stable and there is visibility of earnings and longevity of such companies compared to their smaller counterparts.
HOW DO YOU ALLOCATE TO A LARGE-CAP FUND?
Based on their cash flows investors can make a lumpsum or staggered allocation to large-cap funds. Investors could split it between an active and passive fund. Investors, who are moving from fixed deposits or new to stocks and mutual funds, and are not comfortable with volatility, should start with large-cap funds. Conservative investors can own only large-cap oriented funds.
