The large and midcap fund category still lags largecap funds, and multicap funds in terms of average risk-adjusted returns; holding period should be more than 5 years ideally
Motilal Oswal Mutual Fund has launched a new fund offer (NFO) in the form of Motilal Oswal Large and Midcap Fund. This is the 26th product in the ‘large and midcap fund’ category which boasts of schemes like Mirae Asset Emerging Bluechip and DSP Equity Opportunities Fund. Do remember that this fund category was introduced by SEBI via a circular on categorisation and rationalisation of MFs two years ago. As such, most of the existing funds that are in this category are virtually new because fund-houses tweaked existing fund mandates to fit them to this category.
As you know, a large and midcap fund invests in both largecap and midcap stocks. The NFO period of Motilal Oswal Large and Midcap Fund (MOFLM) is from September 27, 2019 to October 11, 2019. We delve more.
A large and midcap equity fund combines two ideas into one product, just like there is 2-in-1 ice cream, phone with radio etc.
A largecap fund is where the minimum investment in equity & equity related instruments of largecap companies is 80% of total assets.
A midcap fund is where the minimum investment in equity & equity related instruments of midcap companies is 65% of total assets.
In a large and midcap fund, the minimum investment in equity & equity related instruments of largecap companies is 35% of total assets and minimum investment in equity & equity related instruments of midcap stocks is 35% of total assets.
This also means in a large and midcap fund you can have 35% minimum largecap stocks and 65% maximum midcap stocks, or 35% minimum midcap stocks and 65% maximum largecap stocks. There can also be various other combinations like 60%-40% or 50-50% etc.
Below is the return performance of ‘large and midcap funds’, ‘largecap funds’ and ‘midcap funds’
|Sub-Category||1Y return %||3Y return %||5Y return %||7Y return %|
|Large & Mid Cap||1.82||7.93||10.2||13.7|
Besides the large and midcap funds, you already have three existing fund category options you can choose from – largecap fund, midcap fund and multicap fund.
So, what is special about large and midcap funds? The answer, according to fund houses, is better risk-adjusted return — this means a large and midcap fund is supposed to deliver better return for risk taken compared to others.
Is there any data to show that large and midcap funds give better risk-adjusted returns? There are tools like Sortino ratio which measures risk-adjusted performance by taking into account the downside volatility. For instance, the Sortino ratio takes an asset or portfolio’s return and subtracts the risk-free rate (for example, G sec return) and then divides that amount by the asset’s downside deviation. The ratio was named after Frank A. Sortino.
Then there is Sharpe ratio, on the other hand, which measures risk adjusted performance by measuring both the downside and upside volatility. The higher the Sharpe ratio, the better it is. A Sharpe ratio of 1 or higher is commonly considered to be a good risk adjusted return rate. Just like the Sharpe ratio, a higher Sortino ratio result is also better. When comparing two similar investments, an investor would prefer the one with the higher Sortino ratio because it means that the investment is earning more return per unit of the bad risk that it takes on.
Using calendar month returns for the last three years, we found that average Sortino ratio of ‘large and midcap fund category’ was 0.04. Then, we looked at ‘largecap fund’ category and found that average Sortino ratio was 0.32. We also looked at the average Sortino ratio of ‘multicap funds’ and found that they are 0.07, which is better than the category average of ‘large and midcap funds’. The only fund category that ‘large and midcap fund’ does better than is ‘midcap fund’ category, which has a Sortino ratio of -0.16.
This means ‘large and midcap’ fund category is only better than ‘midcap fund’ category in terms of better risk-adjusted returns so far. It has to play catch up with ‘multicap fund’ category.
The fund-house says Motilal Oswal Large and Midcap Fund represents an ideal balance between largecap and midcap universe. Motilal Oswal AMC will currently allocate 50% weightage in largecap (top 100 stocks) (Nifty 100) and 50% weightage in midcap in next 150 stocks (Nifty Midcap 150) until market cap weighted. The minimum allocation allows ‘Hold’ on the midcap companies through its growth cycle.
Motilal Oswal Largecap & Midcap Fund follows the ‘Buy Right Sit Tight’ approach which believes in holding quality companies for a long period of time. It will be a concentrated portfolio of around 20-25 stocks.
The focus will be on companies which can compound income at a steady rate for a long period of time rather than cyclical companies. It will be a concentrated and high conviction portfolio having around 25 stocks.
This is the asset allocation broad plan:
· Equity & Equity related instruments of Largecap companies: 35% – 65%
· Equity and Equity related instruments of Midcap companies: 35% – 65%
· Equity and Equity related instruments of other than above: 0% – 30%
· Units of liquid/ debt schemes, Debt, Money Market Instruments, G-Secs, Cash and Cash at call, etc: 0% – 30%
· Units issued by REITs and InvITs: 0% – 10%
Aditya Khemani is the fund manager of Motilal Oswal Large and Midcap Fund and the debt portion will be managed by Abhiroop Mukherjee
Aashish Somaiya, MD & CEO, MOAMC said, “The largest product segment in the equity mutual funds industry is usually some combination of largecap and midcap stocks which offer a fine balance of relative conservatism with high growth opportunities. We have established a track record with our Motilal Oswal MultiCap 35 Fund since its inception and given the almost 50:50 kind of combination of the Motilal Oswal Large MidCap Fund we are quite positive about the prospects of this fund.”
Benchmark – BSE 200 TRI
Exit Load: 1%- If redeemed on or before 15 days from the date of allotment. Nil- If redeemed after 15 days from the date of allotment.
Plans – Regular Plan and Direct Plan
Options (Under each plan) – Growth, Dividend
Minimum application amount – Rs 500
Additional application amount – Rs 500
Systematic Investment Plan (SIP) – Available in weekly SIP, fortnightly SIP, monthly SIP, quarterly SIP, annual SIP
Minimum redemption amount – Minimum of Rs 500
The Motilal Oswal Large and Midcap Fund gives you an opportunity to create wealth both in largecap and midcap wherein the large companies get better and bigger and midcap companies appreciate into largecap stocks.
Data does not show conclusively that the average risk-adjusted returns of ‘large and midcap funds’ are better than that of ‘multicap funds’ or ‘largecap funds’. It does show that ‘large and midcap funds’ are better than ‘midcap funds’. The Motilal Oswal Large and Midcap Fund is a new fund, and could herald a new chapter in risk-adjusted returns.
The Motilal Oswal MF team is renowned for stock picks, and we have confidence in their security selection methods. Consider this product if you can devote five years or more. Ideally, invest through the SIP route.
Disclaimer: Views expressed here in this article are for general information and reading purpose only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any mutual fund.
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