INSUBCONTINENT EXCLUSIVE:
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
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
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
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
Currently, the ratio has reached over 25 per cent.
According to global experts, ETF assets will double to $10 trillion by 2022 from the
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)
