The year 2016 has been a watershed year for the financial services sector, more so, for the mutual fund industry.
The year 2016 has been a watershed year for the financial services sector, more so, for the mutual fund industry. The inflows in to mutual fund schemes via one-time lumpsum, or Systematic Investment Plans, popularly known as SIPs, is touching new highs every month. Another major factor supporting the inflows is TINA (There Is No Alternative). With real estate, gold and fixed income asset class delivering a sub-optimal return, inflows into mutual fund schemes are growing every month. This is why it has become very important to understand and know which schemes to invest, its salient features of the nature of investments.
Based on the market capitalisation with respect to equity schemes, there are schemes which are termed as large-cap or multi-cap, mid-cap, small-cap and also thematic, which invest only in the specific stocks of the noted theme, say, in pharma or banking. Understanding large-cap funds Often, it is recommended that large-cap mutual fund equity schemes is the route for long term (over five years) equity investing. Large-cap funds invest in top 100 or 200 stocks of the Sensex /Nifty. There are a few schemes of large fund houses, which depicts the fund name followed by top 100 or top 200 which makes it easier for the layman to invest. It is widely acknowledged that investing in large-cap companies comes with lower volatility, predictable cash flows and more secular and linear growth over the investing period. The company’s name will be familiar to a majority of the investors as the investee companies are typically the blue-chip ones.
A blue-chip company means a company with a stable financial track record of earnings and growth for a continued period of time with success. However, investing in large-cap schemes by itself does not guarantee results—i.e., gain or capital appreciation. It is necessary to understand and know how to identify and pick the large-cap schemes. Ways to identify large-cap schemes First of all, identify the fund house. Then identify the scheme’s existence period (more number of years in existence, the better), check if the fund’s assets under management’s growth on year-to-year basis is in line with its peers in the same sector, etc. After that look at the scheme’s performance in both bullish and bearish market phases. Look at the fund manager’s longevity (has the fund manager been the same or has there been quite a few).
Analyse the scheme’s investing principle, whether it is in line with the stated objective of the scheme. Look at the turnover ratio of stocks—lower the better, as in large-cap stocks, the returns do not come instantly and grow gradually. Also, look at the ease of investing in the scheme like on-boarding, post-investment updates, etc). These factors can be analysed from the company’s website. The key is to know where and why you are investing. Large-caps, typically underperform to mid-cap or small-cap over time horizons in excess of five years. But then, they also have lower volatility. In bearish times and or flat market periods, large-caps typically outperform the mid and small-cap schemes. As each has its role to play, return should not be the only criteria for investing. Secular and predictable return is what is more welcome. And large-cap equity schemes of mutual funds do provide this over the investing period.
The author is managing partner, BellWether Advisors LLPa