MID- AND SMALL-CAP FUNDS STEAL THE SHOW

Fund managers believe the risk-reward equation will now favour large-caps, as smaller peers have become expensive

FUND MANAGERS BELIEVE THE RISK-REWARD EQUATION FAVOURS LARGE-CAPS AS THEIR SMALLER PEERS HAVE BECOME EXPENSIVE

Equity mutual funds (MFs) have done very well in 201617 (FY17), outperforming their benchmarks. The median openended equity scheme provided 27 per cent return to its investors in the past 12 months, better than the 17.8 per cent appreciation in the benchmark S&P BSE Sensex during the period.

MFs didn’t disappoint in the short term either, with a typical equity scheme giving 14.9 per cent returns in the past three months, against the 12.2 per cent return provided by the benchmark index during the period. Not surprisingly, individual investors continue to flock to MFs, with most successful schemes reporting strong inflows through systematic investment plans (SIPs).

However, as in the equity markets, not all MF investors were equally lucky. The year belonged to the small- and mid-cap schemes, while large-cap and sector-focused funds lagged. “The schemes reflect the trend in the broader market where small- and mid-cap indices have done better than the benchmark indices consisting of large-caps,” says Navneet Munot, chief investment officer, SBI MF.

Funds focused on mid-, smalland micro-cap stocks stole the show, with the median small-cap fund gaining 34.1 per cent returns in the past 12 months and 23.9 per cent annualised (compounded annual growth rate) returns in the past five years. Mid-cap schemes were second best, with median returns of 32.8 per cent in the past 12 months and 23.3 per cent in the past five years. On the brighter side, all categories of funds provided higher returns, compared to the broader markets in general.

Large-cap funds came after both categories with 20.5 per cent returns in the past 12 months and 14.5 per cent annualised returns in the past five years. Other categories, such as tax planning (equity-linked savings schemes), sector-focused and multi-cap funds were better than large-caps in terms of performance (see table). The analysis is based on 171 open-ended equity schemes with five-year performance record and assets under management of at least ~200 crore as on March 28, 2017. The data was sourced from Value Research.

Large-cap companies have stagnated over the past three years, with the combined net profit of Nifty 50 companies hovering around ~70,000 crore for three years now. As a result, large-cap funds did not perform well last year. “Investors flocked to mid- and small-caps not because they offer great growth stories but because of the inability of large-cap ones to show earnings growth in the past few years. However, if growth revives, large-cap stocks won’t be left behind,” says Anoop Bhaskar, head of equities at IDFC MF.

Fund managers have now turned cautious on mid- and smallcap stocks. “In a bull run, mid- and small-caps always outperform benchmark indices but valuations have turned rich in the segment, while large-cap stocks are relatively cheaper,” adds Munot.

Bhaskar agrees. “Large-caps still account for 82 per cent of the market by value and investors risk missing a major wealth creation opportunity if they ignore large-caps for long.”