Post the SEBI re-categorization exercise and mandating fund houses to declare performance against the TRI of the benchmark, beating benchmark may become difficult for fund managers managing large-cap funds.
Motilal Oswal Asset Management has launched 2 large-cap Index funds. Index funds, by nature, are passive funds and are, therefore, distinct from active funds. The two newly launched funds are – Motilal Oswal Nifty 50 Index Fund and Motilal Oswal NiftyNext 50 Index Fund and have Large-Cap Nifty 50 and Nifty Next 50 as their benchmark, respectively. The NFO for these two Motilal Oswal MF schemes opens on December 3 and closes on December 17, 2019.
Why large-cap index funds
Large-Cap Index funds have a purity of allocation to large caps and are expected to provide stability as they are large in size and more dominant in their sectors. They are also expected to provide additional income in the form of dividends as many Large-Caps generally pay steady dividends. Large-Cap index companies are more transparent in terms of statements and workings lead to ease in decision making for long term investors. The accuracy in evaluation is more due to established knowledge of company history, and wider coverage of current activities and financial statements.
Large-cap sans mid-caps
The Large-Cap index fund may be expected to give returns closest to Index as the active Large-Cap funds include some percentage of midcap and small-cap companies in their portfolios. In the recent past, midcap and small cap companies have underperformed significantly and in any case for investors desirous of managing a pure allocation, mixing of market caps to beat indices is not ideal because it increases their risk.
Beating index becoming difficult
Efficiencies in Large-Cap is increasing by each passing day. Hence it is likely to be incrementally difficult for active Large-Cap funds to generate considerable alpha. Hence a pure Large-Cap index fund should be considered as one of the options during asset allocation.
To sum up
Post the SEBI re-categorization exercise and mandating fund houses to declare performance against the Total Return Index (TRI) of the benchmark, beating benchmark may become difficult for fund managers managing large-cap funds. Choose to go with index funds rather than large-cap funds and for mid, small-cap exposure one may still look at active funds to add to their MF portfolio. But, remember, index funds are supposed to mirror the returns of its benchmark only.