Edited interview.
Large cap mutual funds have proved their worth in these troubled times. The toppers have given over 60%, while most funds given over 45% in the last one year. How do you view this performance?
Largecap mutual funds are ideal solutions for investors who intend to enter the markets as novices. They are equally suitable for long term investors looking to build a long term investment relationship with equities and create wealth over the medium to long term. A typical large cap mutual fund as defined by SEBI invests at least 80% of its assets in the top 100 companies by market capitalization. These companies tend to be well researched and widely tracked. What this also means is that many of these companies are liquid and relatively less volatile as compared to their mid and small cap counterparts.
Fund performance of largecap funds has been in line with the wider market direction. Given that the breadth of the rally is significantly broader, unlike in the previous cycle, this category has done well.
Actively managed large cap funds have reclaimed top positions in the current rally. Do you think these large cap funds are going to stage a comeback?
Large cap funds in essence give investors a fair pulse of the market. Today the top 100 companies account for almost ~75% of the overall market cap of all listed companies in India (source: NSE). Hence it is safe to say that for investors who simply wish to take equity exposure can stick to a simple large cap fund and benefit from the growth of these companies. Over the last few years, the quality profile of large cap companies has significantly improved.
With the advent of CSR, ESG and a host of regulations, these companies have become torch bearers for transparency, disclosure and clean business practices. While there are isolated instances of negativity, by and large these companies have succeeded in creating and building investor confidence. The reward for them and investors is that these companies are well priced and there is a continuous demand for their equity shares from all types of investors be it foreign investors, domestic institutions like us or retail.
Large cap funds used to be everyone’s favourite choice during troubled times. However, investors are betting on other categories now. Is it the new reality?
In essence your question is also your answer. Large cap funds are all weather equity investment solutions. Largecaps, like I mentioned due to their market attributes tend to have lower volatility than mid and small caps. Also due to their business prospects these companies tend to outperform smaller companies due to their market leadership and scale of operations. Companies that do not stay competitive are quickly replaced by nimbler and efficient businesses.
In addition, large cap companies are typically leaders in the large sectors. They represent various segments of the economy including the services sector, manufacturing and exports.
Today in the plethora of funds that investors can choose from, most strategies that are market cap agnostic typically favour largecaps for the precise reason that they score well on fundamental attributes as well as are liquid enough to trade in large quantities. .
Investor psyche is pretty much the same. Hence large cap funds can be a core position in well managed investor portfolios.
Lot of investors believe that most flexi cap funds also invest in large stocks. This is the reason they give while justifying investing in flexi cap funds instead of large cap funds even though they are worried about the market. What do you say to these investors?
Based on individual risk appetite if the investor is clear on his equity asset allocation call, as to what percentage of his / her equity exposure should be in large / mid / small. In that case, its recommended to choose a bouquet of funds in each category.
India is a stock pickers market. With the pace of disruption, we are increasingly finding opportunities across the market cap spectrum for companies with strong growth attributes, well managed balance sheets and high quality niche businesses. The primary markets and the unlisted space have also become large hunting grounds as investors look for alpha.
Flexicap and multicap funds bridge this gap for investors looking for a single fund to meet their investment needs. I run the Axis Bluechip Fund as well as the Axis Flexicap Fund and Axis Midcap Fund. All three funds have unique investment mandates and as such their portfolios are positioned according to what I believe is the best opportunity set within these investment mandates.
For investors looking to select a specific fund type they must evaluate what their portfolios need. Large caps offer relative safety along with growth. Mid and small caps are high growth high reward but also come with their share of risks.
The market is at an all-time high. Should investors be very cautious? What should be their strategy?
Markets at an all-time high is a fact. However, the value of the Sensex or the Nifty is an indicator of the performance of your investments and as such should not be a barometer to deploy or redeem investments. Ultimately when one buys equity either directly or through mutual funds you participate in the earnings of a company or portfolio.
New investors entering equity markets should not get enamoured by the recent run up, rather focus on the long term potential of equity investing. A systematic investment plan is an ideal solution for investors. We remain vigilant in identifying markers and have used elevated valuations to rotate our portfolios. Investors can expect volatility in the near term and should use sharp market drops to systematically add to existing allocations.
Active vs passive debate is still not settled. What is your view? Anecdotal evidence suggests that Investors are warming up to index funds.
The passive story has been playing out very well in India over the last decade or so. While the absolute growth in AUM has been driven by pension funds and government agencies allocating meaningfully to equities through ETFs, there has been a large awareness drive that has resulted in investors appreciating the benefits of low cost investing.
The west has seen a widespread acceptance of this since markets there have reached a stage of market efficiency where an active fund manager has limited headroom to outperform benchmarks meaningfully. In India, given the vibrancy of the markets and the improving market awareness, there is a scope for active management as well. Investor portfolios today must look to allocate across both types of products to get the best out of their equity investments.
