Large-Cap Stocks Are Quite Liquid
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T Shrikanth Bhagavat, Managing Director,
Hexagon Capital Advisors
I had invested in LIC Vision Fund three years ago, but this fund was merged into LIC Equity Fund last month. My holdings are now transferred to LIC Equity Fund. Should I continue investing in this fund? – Pradeep Soni
You are wise to re-consider your investment. LIC Nomura Equity Fund is a Large-Cap fund benchmarked to the S&P BSE Sensex. However, the fund has underperformed its benchmark as shown in the chart. Over the last 10 years, it has generated a CAGR of a meager 15 per cent. During the same period, the Sensex has generated a CAGR of nearly 20 per cent while some Large-Cap funds have generated even higher returns.
As seen in the table, LIC Nomura Equity Fund has also underperformed its category and is relatively more volatile as the fund has a higher standard deviation than its Large-Cap counterparts. HDFC Top-200 is an exception and has a slightly higher standard-deviation than LIC Nomura Equity Fund on a one-year and three-year basis since the fund is benchmarked to the BSE 200 and invests a small portion of its portfolio in small and Mid-Cap stocks.
| Fund Statistics as on June 3, 2013 |
|---|
| Scheme Name | CAGR | Standard Deviation |
| 1 Yr | 3 Yrs | 5 Yrs | 10 Yrs | 1 Yr | 3 Yrs | 5 Yrs | 10 Yrs |
| Birla SL Frontline Equity Fund(G) | 28.13 | 7.36 | 9.95 | 24.35 | 4.43 | 4.74 | 8.12 | 7.63 |
| Franklin India Bluechip Fund(G) | 19.63 | 7.01 | 9.41 | 24.77 | 3.97 | 4.45 | 7.56 | 7.46 |
| HDFC Top 200 Fund(G) | 19.49 | 5.55 | 10.31 | 26.55 | 5.28 | 5.27 | 8.44 | 7.89 |
| ICICI Pru Focused BlueChip Fund(G) | 22.32 | 9.23 | 13.09 | - | 3.88 | 4.58 | 7.21 | - |
| LIC Nomura MF Equity Fund(G) | 18.58 | 2.75 | 3.12 | 15.22 | 4.02 | 4.89 | 8.84 | 8.77 |
| S&P BSE SENSEX | 22.7 | 4.83 | 4.2 | 19.93 | | | | |
Additionally, in April 2013, the LIC Nomura Equity Fund had invested more than 15 per cent of its corpus in FMCG stocks. In contrast, most fund managers have gradually reduced their exposure to FMCG stocks over the last few months. This is a result of the valuations of FMCG stocks being very expensive. The CNX FMCG Index is currently trading at a P/E of 37.98x while the Nifty’s P/E is only 17.75x (Source: NSE).
Although FMCG stocks have rallied significantly during the last year, this trend may not be sustained when economic recovery begins. Defensive stocks (like FMCGs) usually generate lower returns than cyclical stocks (like banking stocks) in the upswings of the business cycles. In April 2013, the Large-Cap funds (seen in the table here) had invested less than 10 per cent of their portfolios in FMCG stocks.
LIC Nomura Equity Fund has an additional handicap – the fund’s AUM is relatively small. On April 30, the fund’s AUM was only Rs 68 crore. Its portfolio is predominantly invested in Large-Cap stocks which are quite liquid. However, the fund’s returns may be adversely affected if several investors in the fund choose to redeem their holdings at once.
Hence, you should stop your investments in LIC Nomura Equity Fund and redeem the existing ones. You could switch to another Large-Cap fund. These funds have consistently generated high risk adjusted returns and are amongst the best performers in the Large-Cap space. These funds have outperformed the Sensex in the long-run and are less volatile than the LIC Nomura Equity Fund. Furthermore, these funds have established track records with large AUMs.
In conclusion, it would be a good idea to redeem your investments in LIC Nomura Equity Fund and switching to another Large-Cap fund. This should help you maximise the returns from your investments and simultaneously reduce the volatility of your returns.