Beating the benchmarks has become hard for large cap schemes of fund houses. Even though nearly 82% large cap schemes have underperformed in the last five years, there are outliers that have beaten the benchmarks by a long shot. While life-cycle and size of a fund can impact returns of large cap funds, it is interesting to note schemes from Nippon, Invesco and ICICI Prudential beat the benchmarks in FY22 even though their peers seem to be struggling. Despite the volatility and new money chasing the hyped platform businesses, what has worked for fund houses has been keeping things simple and staying loyal to their investment philosophy. Explains Prakash Gaurav Goel, senior fund manager, ICICI Prudential AMC, “Our process is designed to focus more on fundamental value and ignore the recency biases, which helped us do well across schemes and themes in FY22.”
Choosing the right schemes and fund houses can make all the difference to an investor’s returns, as data show that some schemes are delivering alpha even in large cap schemes. According to data compiled by Prime Database, Invesco’s large-cap fund was the top performer in the category and it delivered returns of 24.46% against a 17.07% rally in the BSE Sensex during financial year 2022. Schemes from Nippon Mutual Fund, IDBI Mutual Fund and ICICI Prudential Mutual Fund also managed to beat benchmarks by delivering returns of 24.24%, 23.78%, and 21.5%, respectively, during the year.
Experts believe that fund managers typically face challenges beating the benchmarks in a bullish market, when the indices perform better and the rally is higher than 10-15% in a given year. Speaking to FE, Nikhil Kamath, co-founder, Zerodha, said, “Each fund has a different life-cycle and it won’t be the same fund that will beat the markets every time, as it is cyclical and keeps on changing. Generally, in a market which is bullish, it becomes difficult to beat the benchmarks. If you have a year in which markets moved from 0-10%, it is possible to beat the benchmarks, while if the markets move up around 15% or more, like it did last year, it becomes difficult for funds to beat the benchmarks.”
Also, funds run by AMCs like Nippon and Invesco manage to outperform because they are run very efficiently. “I think the thesis these funds have is working accurately for them right now,” added Kamath.
In the broader markets, the mid-cap and small-cap funds have fared much better than the large-cap funds, data compiled by primemfdatabase.com shows. Mid-cap funds have delivered returns in a range of 27-49%, whereas funds focused towards the small-cap category have delivered returns in a range of 48-58%. Quant Mutual Fund, Motilal Oswal Mutual Fund and PGIM Mutual Fund have been the top performers in the mid-cap category — with returns of 49%, 38%, and 35%, respectively, against the BSE mid-cap’s rally of 17.5% during the period.
According to fund managers, funds in the mid-cap and small-cap category typically outperform in an improving economic cycle and stable markets, as investors bet on smaller companies, with expectations of such companies turning into big players in the future. “Mid- and small-cap sector does well in improving economy time. Given the speedy recovery in the economy after the pandemic, stable and growth supportive government policies, and regulatory regime, mid- and small-cap did well in FY22,” Prakash Gaurav Goel, senior fund manager, ICICI Prudential AMC, told FE.
Going forward, FY23 is expected to be a tough year for the equity markets due to several headwinds, including the geopolitcal crisis and the rate hike scenario. Returns from markets in the next couple of years will not be as good as the previous year, and the overall structure of the markets is expected to remain in the bearish zone, said experts.
