Large-cap funds: Be prepared for lower Alpha

If we see the performance of large-cap funds, more than 20 schemes are under performing their respective benchmark since the start of this year. The year 2018 started with a bang where the most followed indices BSE Sensex and Nifty50 hit all-time highs, but post the Union Budget 2018, the market momentum has changed totally. The drastic drop in the market are being reflected in the mutual fund NAVs.

This is expected to continue and experts have asked investors to have moderate return expectation in the upcoming years and have a marginal alpha over their respective benchmark. If we follow the performance of the indices in the last 6 months, it seems to be moderate. The benchmark index BSE Sensex has given 3 per cent returns in the last 6 months, whereas Nifty50 stood at around 1 per cent during the same period.

As the Indian markets are maturing, slowly the kind of alpha generation investors have witnessed during the last few years would not repeated in the upcoming years. At the same time, the norms mentioned by the market regulator SEBI with respect to categorisation and reclassification of the schemes have hampered the alpha of the funds. SEBI has mandated a new investment style for categories, where for the large-cap funds it has guided funds to invest atleast 80 per cent of their corpus into the top 100 stocks, as per the market capitalisation. Due to this, the alpha generation in the large-cap funds would be hampered going ahead as there is limited scope to invest into the stocks from other market caps. Moreover, SEBI has further ordered to align all the mutual funds against the TRI (Total return index) which includes dividend aspects, which is making it more difficult for the large-cap schemes to beat the benchmarks.

Previously, in the absence of definite guidelines, fund managers were used to shuffling the investment among a wide range of stocks, across various market caps like mid-caps and small-caps which helped them generate excess returns and thereby alpha. However, with the introduction of the above aspects market regulator has put restriction on the broader investment universe of the fund managers. Moreover, weak macro environment is another key aspect which is hampering the returns. So we see in the near terms, the mutual fund industry and investors would witness more of benchmark hugging large-cap schemes.

So investors who are aspiring for higher returns in the longer run should be checking out other options as per their risk appetite. However, risk averse investors should curtail down their extraordinary return expectation from the large cap funds. However, 2019 election can be seen as one of the important factor for the markets and from then on, investors can expect stable returns from the large-caps as well. So we see the large-cap funds to be more stable from here onwards and they would offer stable returns over the period of time.