19
By B GOPKUMARRecent regulatory actions have forced India’s mutual fund houses to re-classify their existing schemes.
The sole motto of the new guidelines is basically to rationalise the plethora of schemes, which, at times, were quite confusing for investors.
This, often, led to poor investment decisions, and even misselling of mutual funds schemes.
In the wake of re-classification, large-cap schemes are likely to lose weight when it comes to creating wealth for investors.
These schemes, as the category suggests, invest in top companies which are usually part of the benchmark indices of the Indian stock market indices — the Sensex and the Nifty 50.
However, if one looks at the return of the large-cap category over the past decade, one finds that vis-a-vis their benchmarks, the category has continuously failed to beat the benchmark with a wide margin.
DISMAL SHOW BY LARGE-CAP FUNDSFor instance, in the past year, the category average return of large cap schemes stood at 11.02 per cent as on July 2, 2018.
The return of Nifty 50 index was higher at 11.87 per cent.
Similarly, in the past 10 years, large-cap schemes generated a return of 11.07 per cent, while Nifty50 index returned 10.58 per cent.
The alpha return, thus generated, is merely 49 basis points — that too in the span of 10 long years.
This is not only disappointing, but also an injustice to investors’ hard-earned money.
And what is more concerning is the fact that all this happened at a time when the current new guidelines of re-classification were not in force and fund managers were free to construct the scheme’s portfolios by cherrypicking stocks.
After reclassification, the performance has further slipped.
Till July 13, 2018, large-cap funds on an average recorded a return of 1.11 per cent, compared to 1.92 per cent of the NSE 100 ETF and 3.73 per cent of the BSE Sensex ETF.
Since the beginning of the year, the performance of largecap funds is even more dismal.
Between December 31, 2017 and July 13, 2018, large-cap funds on an average gained less than 1 per cent at 0.68 per cent, compared to 3.59 per cent of the Nifty 100 ETF and 8.84 per cent of the BSE Sensex ETF.
We must remember that the sole objective of the fund manager is to generate risk-adjusted higher alpha return (or benchmark beating returns) for the investors.
But that doesn’t seem to be happening.
Now the question arises is whether large-cap funds are worth investing going forwardRs If they are not, what alternative an investor has if she wants to reap the benefit of stock markets by being in large-cap stocksRs
It is here that one needs to know and understand exchange-traded funds (ETF).
Given the current status of large-cap schemes’ performance and expected scenario going forward on the back of fund managers’ commentaries and regulatory actions, ETFs look quite a preferable option compared with large-cap funds.
ETFs VERSUS LARGE-CAP MUTUAL FUNDThe returns from ETFs may either be on a par with large-cap schemes or better as has been seen in recent years.
Second, ETFs would be much cost-efficient as fees in ETFs could be as low as 0.01 per cent while fees for large-cap mutual fund scheme can be anywhere between 1.5 per cent and 2.5 per cent.
Such a huge differential in fees can really make ETFs far superior as higher expense fees of largecap funds tend to impact the returns in investors’ hands.
Third, the net asset values (NAV) of largecap schemes, like any other mutual fund schemes, are calculated after the closing of market hours, thus investors get a certain price every day.
However, in case of an ETF the price changes throughout the day and investors get several price levels of entry or exit points and thus are not limited by the post market hours NAVs.
The other reason to avoid large-cap funds would be the high churn in the schemes.
India already has started showing signs of significant rise in ETF activities.
In the past two years, ETF assets (barring gold ETFs) has improved from 1 per cent of the total mutual fund assets to 4 per cent.
In absolute terms, the size has grown from Rs 177.43 billion in May 2016 to Rs 812.72 billion in May 2018.
This is an indication that smart investors are fast realising the power, importance and effectiveness of ETFs over the plain vanilla large-cap funds.
Currently, the ratio has reached over 25 per cent.
According to global experts, ETF assets will double to $10 trillion by 2022 from the current $5 trillion.
ETFs are the future.
As the market matures and alpha generation becomes difficult, it will become tough for fund manager to beat the benchmark or index.
Therefore, it will be in investors’ interest to recognise the potential of ETFs well in advance and seriously take it as a strong alternative to large-cap funds.
(Author is executive director at Reliance Securities)
