Will large cap mutual funds struggle to beat Nifty 100 Equal Weight Index?

Published: August 24, 2018 at 10:00 am

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Using the August 2018 Equity Mutual Fund Performance Screener published yesterday, we find out how large-cap and value-oriented mutual funds have fared against the Nifty 100 Equal Weight Index. This index has equal exposure to the top 100 stocks by free-float market capitalization. Sundaram and Principal AMC have index funds based on this. So like the Nifty Next 50 (another hard to beat index- see link below), it is practically possible to track this index (although both the funds have low AUM).

In Feb 2017, I had indicated that the NIFTY 100 Equal Weight Index is a promising Mutual Fund Benchmark. Also in April 2018, while warning that the Nifty NExt 50 is not a large-cap index, I had indicated that the Nifty 100 Equal Weight (N100EW) is a promising low-risk alternative to the Nifty next 50. Also watch: my talk on index investing: Can we get higher returns with lower risk?

Nifty 100 Equal Weight Index: Will large cap mutual funds struggle to beat this index ?

Index Investing Resources

Why we badly need a Midcap & Smallcap Index Fund: Performance Comparison with Nifty Midcap 100 & Nifty Next 50

Nifty Next 50: The Benchmark Index That No Mutual Fund Would Touch?!

Are Nifty Smart Beta (strategic) Indices better than the Nifty Next 50?

Nifty 100 Equal Weight Index vs large cap and value-oriented funds

A total of 45 large-cap funds (including Sensex and Nifty Index funds) and 13 value-oriented funds were compared with N100EW. Only direct plans were considered and 1,2,3,4,5 year durations were used. With the exception of Quantum Long Term Equity (QLTE), all other funds only allow a comparison of 150 5-year periods.

Out of the 1755 5Y periods studies for QLTE, the fund has outperformed N100EW an impressive 1490 times (85%) This 85% we refer to as outperformance consistency. Out of the remaining 56 funds, only the following 22 have an outperformance consistency of greater than 75%.

Aditya Birla Sun Life Focused Equity Fund – Growth – Direct Plan
Aditya Birla Sun Life Frontline Equity Fund – Growth – Direct Plan
Axis Focused 25 Fund – Direct Plan – Growth Option
ICICI Prudential Nifty Next 50 Index Fund – Direct Plan –  Growth
IDBI Nifty Junior Index Fund Growth Direct
Invesco India Largecap Fund – Direct Plan – Growth
Reliance Large Cap Fund – Direct Plan Growth Plan – Growth Option
SBI BLUE CHIP FUND-DIRECT PLAN -GROWTH
JM Core 11 Fund (Direct)  – Growth Option
HDFC Capital Builder Value Fund -Direct Plan – Growth Option
Templeton India Value Fund – Direct – Growth
Aditya Birla Sun Life Pure Value Fund – Growth – Direct Plan
ICICI Prudential Value Discovery Fund – Direct Plan – Growth
IDFC Sterling Value Fund-Direct Plan-Growth
Invesco India Contra Fund – Direct Plan – Growth
L&T India Value Fund-Direct Plan-Growth
Reliance Value Fund – Direct Plan Growth Plan
Tata Equity P/E Fund -Direct Plan Growth
ICICI Prudential Bluechip Fund – Direct Plan – Growth
BNP Paribas LARGE CAP Fund – Direct Plan – Growth Option
Quantum Long Term Equity Value Fund – Direct Plan Growth Option
Kotak India EQ Contra Fund – Growth – Direct

Out of the above 22 funds, 18 also have good downside protection (>75%). That is, typically those 18 funds fall lower than the index. The remaining 35 funds have a (return) outperformance consistency wrt N100EW as listed below. About 15  are Nifty and Sensex Index funds.

FundOutperformance consistency over 5Y
Axis Bluechip Fund – Direct Plan – Growth59%
Kotak Bluechip Fund – Growth – Direct24%
Edelweiss Large Cap Fund – Direct Plan-Growth option21%
HDFC Top 100 Fund -Direct Plan – Growth Option14%
L&T India Large Cap Fund – Direct Plan – Growth9%
UTI – Master Share-Growth Option – Direct2%
Franklin India Bluechip Fund- Direct – Growth0%
Franklin India INDEX FUND NIFTY PLAN – Direct – Growth0%
HDFC Index Fund Sensex Plan-Direct Plan0%
HDFC Index Fund-Nifty 50 Plan-Direct Plan0%
UTI – NIFTY Index Fund-Growth Option- Direct0%
Taurus Largecap Equity0%
Taurus Nifty Index Fund-Direct Plan-Growth Option0%
Aditya Birla Sun Life Index Fund – Growth – Direct Plan0%
DSP BlackRock Top 100 Equity Fund – Direct Plan – Growth0%
Essel Large Cap Equity Fund-Direct Plan-Growth Option0%
HSBC Large Cap Equity Fund – Growth Direct0%
ICICI Prudential Nifty Index Fund – Direct Plan Cumulative Option0%
IDBI NIFTY Index Fund Growth Direct0%
IDFC Large Cap Fund-Direct Plan-Growth0%
IDFC Nifty Fund-Direct Plan-Growth0%
Indiabulls Bluechip0%
Principal Nifty 100 Equal Weight Fund – Direct Plan – Growth Option0% (this is expected due to expenses)
Reliance Index Fund – Nifty Plan – Direct Plan Growth Plan – Growth Option0%
Reliance Index Fund – Sensex Plan – Direct Plan Growth Plan – Growth Option0%
SBI NIFTY INDEX FUND – DIRECT PLAN – GROWTH0%
Tata Index Fund  – Nifty-Direct Plan Nifty0%
Tata Large Cap Fund -Direct Plan Growth0%
JM Large Cap Fund (Direct) – Growth Option0%
Canara Robeco Bluechip Equity Fund – Direct Plan – Growth0%
LIC MF Index Fund-Nifty Plan-Direct Plan-Growth0%
LIC MF Index Fund-Sensex Plan-Direct Plan-Growth0%
LIC MF Large Cap Fund-Direct Plan-Growth0%
UTI Value Opportunities Fund- Direct Plan – Growth Option0%
SBI CONTRA – DIRECT PLAN – GROWTH0%

Excluding the index funds, only half the active funds have consistently outperformed 75% or better. So as regards the titular question, even now it seems to be a struggle for large caps to outperform the N100EW. Could well become harder in future. From June, large-cap funds can only invest 80% of their assets in the top 100 stocks. So the N100EW is a suitable index for comparison. In the past, many large caps had anywhere between 15-30% of midcaps at any given time.  Even after the SEBI recategorization, it should be possible for large-cap funds to beat Sensex or Nifty (as they are market cap weighted). The challenge would be N100EW.

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These six funds have got 25% more return than N100EW over the 5Y periods considered almost always!!

Invesco India Contra Fund – Direct Plan – Growth
Tata Equity P/E Fund -Direct Plan Growth
IDFC Sterling Value Fund-Direct Plan-Growth
L&T India Value Fund-Direct Plan-Growth
Aditya Birla Sun Life Pure Value Fund – Growth – Direct Plan
ICICI Prudential Value Discovery Fund – Direct Plan – Growth

It is striking that all of them are value-oriented!

Over 3-years, 600 data points were available. However, only 15 out of 57 funds consistently beat N100EW >= 75%.

Now, these 19 funds have less than 60% outperformance consistency over 1,2,3,4,5 years!!

Indiabulls Bluechip
Axis Bluechip Fund – Direct Plan – Growth
Kotak Bluechip Fund – Growth – Direct
HDFC Top 100 Fund -Direct Plan – Growth Option
Essel Large Cap Equity Fund-Direct Plan-Growth Option
SBI CONTRA – DIRECT PLAN – GROWTH
L&T India Large Cap Fund – Direct Plan – Growth
Tata Large Cap Fund -Direct Plan Growth
Edelweiss Large Cap Fund – Direct Plan-Growth option
UTI – Master Share-Growth Option – Direct
Canara Robeco Bluechip Equity Fund – Direct Plan – Growth
Franklin India Bluechip Fund- Direct – Growth
HSBC Large Cap Equity Fund – Growth Direct
JM Large Cap Fund (Direct) – Growth Option
IDFC Large Cap Fund-Direct Plan-Growth
LIC MF Large Cap Fund-Direct Plan-Growth
UTI Value Opportunities Fund- Direct Plan – Growth Option
DSP BlackRock Top 100 Equity Fund – Direct Plan – Growth
Taurus Largecap Equity

So what should we do?

There was a time ICICI Nifty Next 50 had a low AUM. But over the last year, it has increased significantly. I expect the same to happen to Sundaram and Principal N100EW index funds. At that point, those who have the confidence to manage risk on their own can consider a shift from large-cap funds. For now, let us watch from the sidelines.

As strategic indices become more popular, mutual fund houses can no longer claim outperformance over market cap weighted indices. I had always maintained that when the facts change I will change my stance too. I think there is more than enough evidence that we are on an extended inflexion point where index investing seems to make sense for those who can manage risk. I had already lamented that we do not have a midcap index fund (anymore!)

Yes, there are about 50% of active funds that can outperform a strategic index (return-wise). However, since we cannot know which those funds are beforehand, indexing is the simplest solution. However, lack of popular options and lack of liquidity in ETFs are still obstacles. As mentioned in this post: Here is how you can select ETFs by checking how easy it is to buy/sell them, we cannot rush progress. As our equity market grows in popularity, index investing will become a viable option We just need to sit it out.

If you cannot stomach paying fees to active large-cap funds, then switch to equity-oriented balanced funds: Using Balanced Mutual Funds As The Core Equity Portfolio Holding At least there, the fee has better justification (more on this later). Note that both N100EW index funds have only about 19-20 Cr in AUM each. Unless this improves fast, the AMC will simply shut down the fund or merger it with another. So don’t get too excited with the “I told you so about indexing” mode. Still, early days and still not hard to beat market cap weighted large cap indices. It is not enough if facts change. Practical alternatives must also become popular enough.

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