Blue chip and large cap equity mutual funds had witnessed a steady downward curve in 2018. Read on to know the factors that led to this trend.
As per the records from the last year, a majority of the stocks that had rallied belong to the large cap category. Only 40% of the stocks from the BSE 100 category have generated returns over and above the index.
However, the scenario has not been as grim for small and mid-cap equity mutual funds. The contradicting market conditions have been the cause of most stocks taking a beating, while only some of them have fared well in the market. But, this pattern is not solely due to factors like funds strategy, market rally, fund managers exercising more caution or lack of effective investment choices. There is much more to it than just these.
Why blue chip and large cap equity mutual funds did not perform well in 2018
Here are some of the pertinent factors that have created the situation in 2018:
- Sensex and Nifty 50 had not been reflected throughout the investment market.
- Most blue chip and popular large cap equity mutual funds have been underperforming because the market rally has been narrow in 2018.
- The underperformance of blue chip and large cap equity mutual funds in the last year has been the result of chain reactions of the previous years. The underperformance of these funds has not been restricted to 2018. Its performance has been on the downslide since a couple of years now. Hence, its effect has been the most pronounced last year.
Digging deeper into the market scenario, let’s see how the above factors have affected the sub-optimal performance.
What caused the investment market turbulence?
Equity mutual fund performance has reached its saturation point
Stocks of some equity mutual funds had risen sharply early last year and had been consistently performing well. Some of these are Kotak Mahindra Bank, HDFC Bank, Motilal Oswal Focused 25, Franklin India Bluechip, SBI Bluechip, Mirae Asset India Equity. Since these have consistently recorded a high exposure in the last year, there is no scope for them to perform better.
Difficult investment decisions
The indices show a skewed representation of the investment market because very top large cap equity mutual funds have been performing highly in the recent times. Fund managers would deliberately want to invest in a healthy mix of mutual funds to balance out the portfolio. But, at the same time, not all of these funds have been generating high returns because most top large cap and blue chip mutual funds have not been performing well. Despite the market not-so-good performance of large cap equities, investing in them is unavoidable, thus, automatically affecting the portfolio performance.
Stock-specific patterns have been making up for the rallying stocks
Stock-specific trends have been gradually replacing the dominant sector-wide investment pattern. However, there are emerging sector-specific equity mutual funds that have been performing well in the last few years, except software and selective stocks from industries like FMCG, banks and capital goods.
Narrowing investment options in large cap equities
The number of large cap equity mutual funds that have stood out in terms of their high market performance can be counted on fingertips. Some of the popular ones are HUL, NTPC, Bajaj Finance, Godrej Properties, Jubilant Foods, Indiabulls and a few others. While small ad mid cap equity mutual funds have been showing visible signs of improvement, the same cannot be said for blue chip, and large and multi cap funds.
The recent trends make it apparent that investing in the usual top performers does not make for a smart fund strategy. Market conditions may not be very encouraging for most large cap and blue chip equity mutual funds. However, that does not undermine the importance of a streamlined investment approach through a fund strategy. What you now need to do is make well informed decisions and calculate risks rather than just stay buoyant to achieve healthy returns. Therefore it is advisable not to simply invest in large cap equities that are recognized as top performers.
Recommended Read: How to Build an Ideal Mutual Fund Portfolio?