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Wednesday, June 01, 2011

Equity Diversified Funds with High Large Cap Tilt See High Growth over Two Year Period

AUM of Equity Large Cap Funds See a significant growth 

Equity Large Cap Funds that have major portion of its exposure in fundamentally strong scripts have sailed through the ups and downs in the Indian equity market during the last two years. The Assets under Management (AUM) of this category has seen a significant growth, up over 100% from Rs 25914.75 crore in March 2009 to Rs 55466.38 crore in March 2011. The return from this category of schemes, have been in the range of 1.66% to 29.03% return over two year time period upto 25 May 2011. 

Though the markets have gained in the long term, in the last few months' market have got beating. Indian equities have skid down since the beginning of the new calendar year 2011 due to various factors as global cues, political crisis, high crude prices & inflation and Reserve Bank of India had increased the interest rates to curtail inflation. Sensex has been in the range of 17463.04 points to 20561.05 points (data from 1 January 2011 to 25 May 2011). 



Risk-Return Analysis for Large Cap Equity Funds 
 
Equity Large Cap Funds had delivered an average two year return of 15.53% as on 25 May 2011. We have tried to explain with the help of a diagram, which is divided into four quadrants, with each quadrant containing schemes of a particular risk-return profile. The size of the bubble indicates the size of the fund. (Returns are compounded annualized and open ended growth schemes alone are considered).

Funds Positioned in Low Risk High Return quadrant: During the two year period ended 25 May 2011, equity large cap funds covered in the Low Risk High Return quadrant had returns in the range of 16.51% to 29.03%. There were sixteen schemes which appeared in this quadrant. 

The schemes in the low-risk high returns quadrant outperform the peer group on the risk-adjusted returns basis as they deliver higher returns compared to the peers without exposing the portfolio to very high risk. Quantum Long-Term Equity Fund had taken a low risk of 0.94% and had delivered a two year return of 29.03%. The other schemes which had been in the same quadrant include, HDFC Equity Fund with a low risk of 1.13% had delivered a high return of 26.97%. HDFC Core & Satellite Fund had taken a low risk of 1.07% and delivered a high return of 26.01%. HDFC Top 200 Fund with a low risk of 1.12% delivered high return of 22.20%. DSP BR Equity Fund with a low risk of 1.06% delivered high return of 21.12%. Principal Large Cap Fund with a low risk of 1.06% delivered high return of 20.90%.



Funds Positioned in High Risk High Return quadrant: The schemes in the high-risk high returns quadrant follow a very aggressive approach and deliver high compounded annualized growth return (CAGR). The equity large cap funds covered in the High Risk High Return quadrant had posted returns in the range of 16.15% to 20.01%. Templeton India Growth Fund had taken a high risk of 1.18% and had delivered a two year return of 20.01%. 

The other schemes which had been in the same quadrant include Sundaram India Leadership with a high risk of 1.32% had delivered a high return of 18.19%. Birla Sun Life Top 100 Fund had taken a high risk of 1.18% and delivered a high return of 17.96%. Tata Pure Equity Fund with a high risk of 1.17% delivered high return of 17.30%. Sundaram Growth Fund with a high risk of 1.31% delivered high return of 16.41%. Reliance Vision Fund with a high risk of 1.19% delivered high return of 16.15%.
 
Fund Analysis


We have analyzed the top four equity large cap funds based on the sharpe ratio. Sharpe Ratio reflects the risk adjusted returns, that is, the returns per unit of risk. A high ratio is always better than a low ratio. 

Quantum Long-Term Equity Fund though being one of the small fund in the equity large cap fund category with a corpus of Rs 76.68 crore as at the end of April 2011, it has managed to deliver a high risk adjusted over the two year time period. Moreover this scheme has topped this category in terms of return over two year time period. The latest portfolio of this scheme indicates that it has high exposure towards sectors such as Banks (14.10%), Software (8.96%), Finance (7.76%) and Automobile (7.03%) among the others. This scheme has outperformed its benchmark index, TRI Sensex by 2.37%, 14.54% and 11.09% over 1 year, 2 year and 3 year time period respectively.

HDFC Core & Satellite Fund has outperformed its benchmark index, BSE 200 by 4.65%, 11.90% and 10.58% over 1 year, 2 year and 3 year time period respectively. The schemes latest portfolio indicates that its has high exposure towards sectors such as Software (15.92%), Banks (9.47%), Pharmaceuticals (7.66%) and Capital Goods – Electrical Equipment (7.55%) among others. 

HDFC Equity Fund and HDFC Top 200 Fund from the HDFC Mutual Fund family have continued to be top performers for investors over long time. The size of these funds is huge and the fund manager has compensated the investors with good returns for investing into these funds over long run. Both these funds have outperformed their respective benchmark by huge margin over 1 year, 2 year and 3 year time period.

DSP BR Equity Fund has high exposure towards sectors such as Banks (12.32%), Finance (7.64%), Software (7.28%) and Crude Oil & Natural Gas (6.11%) among others. It has outperformed its benchmark index, S&P CNX 500 by 3.33%, 8.46% and 7.67% over 1 year, 2 year and 3 year time period respectively.

Conclusion

The equity diversified funds with high large cap tilt are expected to do well due to its advantage of investing in fundamentally sound scripts. Equity Large Cap Funds offer better protection to investors in the downturn. These schemes are suitable for investors who are not aggressive but would like to benefit from the equity markets over long run. 

Moreover these funds would get assistance from India's economic growth. India's domestic economy continues to remain on a strong footing with long term growth prospects visible. The same is expected to drive the equity market over a longer period of time.

Higher crude oil prices, higher inflation and higher interest rates kept the equity market sentiments lower in recent times. Equity Large Cap Fund investors should make of the dip in the market as an opportunity to invest for long term.
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