NFO review: Principal Large Cap Fund, a dash of US stocks on top of domestic large cap basket

With the largecap fund category being a crowded space, the AMC wants to offer a unique flavour by adding an India-US angle in their strategy

Kumar Shankar Roy Sep 16, 2020

mutual fundsGeographical diversification and largecaps are two investment approaches that are being combined by Principal Asset Management, the investment manager of Principal Mutual Fund, in a first-of-its-kind offering that promises to invest in the biggest companies of India and the US.

The new fund offering is called ‘Principal Large Cap Fund’, which opens for subscription on September 28 and closes on October 12. The highlight of the largecap equity scheme is the combo nature; it’s virtually a domestic largecap fund alongwith a mini US fund flavour due to its upto 15% targetted American largecap equities exposure. In this article, we will understand more about this investment alternative and try to understand what’s really special about it if at all. Read on.

Why largecaps

The new scheme is a largecap fund. Strangely enough, Principal didn’t have one so far. It has a product in most of the other equity categories.

In fact before Sebi’s recategorisation in 2017-18, Principal had a largecap scheme but that was made into a focused equity scheme with multicap flavour.

As per norms, a largecap fund has to have a minimum 80% investment in equity & equity related instruments of large cap companies. They invest predominantly in largecap stocks.

The common arguments for buying largecaps are simple: big companies, proven leaders and safer compared to mid or smallcaps. It is common for big companies to get bigger, muscling out competition.

What the fund will do

Principal Large Cap Fund will target a portfolio of Indian and American bluechips. The American part is an attempt to catch the attention of investors who want to invest in American stocks.

As the first largecap fund in India combining Indian and Foreign
companies, Principal Large Cap Fund will have 80% to 85% in Indian equities with minimum 80% in largecap companies. Upto 15% will be in US largecap companies.

You can expect a stock portfolio of 50 to 60 companies. In India, largecap stocks are the top 100 in terms of market cap. So, the shopping universe in India is 100 stocks from where some will be picked. In America, the fund’s equity universe will consist of US companies with a market cap higher than $50 billion.

Principal Large Cap Fund will give emphasis on fundamental research and portfolio construction. It will have a sector agnostic approach with bottom up stock selection. The targeted portfolio will have more ‘Growth’ quotient than the ‘Value: quotient. Earnings Growth and Return ratios to be the preferred metrics of stock selection.

What does US stocks addition give

According to Principal, US stocks offer enhanced gains. For instance, 7 of the last 11 years (including CY2020) the addition of S&P500 to a portfolio has helped a composite index of (85% NIFTY 100 TRI and upto 15% S&P 500 INR).

Also, lower volatility is provided. Adding the S&P 500 INR has also reduced the portfolio across investment horizons.

Additionally, US stocks allow benefit from potential rupee depreciation.

The US stock picks of the fund will be boosted by access to advice and research from the US based PGI Equity team.

Principal Large Cap Fund

Additional facilities

Principal Large Cap Fund has access to two features.

Smart – Aims to protect against sharp fall in market. 25% is invested in the Principal Large Cap Fund and 75% into Principal Cash Management Fund. If the market falls below 3% from the date of allotment, the SMART Facility gets activated and 25% of the invested amount is deployed in Principal Large Cap Fund. In case if the market does not fall, the switch takes place at month end from Principal Cash Management Fund to Principal Large Cap Fund. If the SMART Facility deployment takes place during the month based on market fall, the month end switch gets deactivated for that month.

My Gain – Shifts appreciated amount to another fund. Here you invest in Principal Large Cap Fund. You also specify the target rate of return to facilitate auto trigger. If investment appreciates to reach the target rate of return, units are redeemed from Principal Large Cap Fund and amount switched to any Principal Fund of your choice.

Fund basic details

Plans – Direct & Regular

Options – Growth & Dividend

Benchmark – Nifty 100 TRI

Minimum application amount – Rs 5000.
For SMART facility – Rs 25000.
For SIP – Rs 500 each for minimum 12 installments.
For STP – Rs 1000 each for minimum 6 installments.

Exit load – NIL if redeemed/ switched on or before 365 days from the date of allotment upto 24% of the units allotted
(the limit). 1% load on redemption in excess of the limit.

Fund manager(s) –
Sudhir Kedia and Anirvan Sarkar.

RupeeIQ take

With Principal Large Cap Fund, you get a chance to invest in quality companies not just from India, but also some of the US’ corporations. So, with single investment, you can own some top domestic and global brands. Unless stock selection is poor, a largecap fund with 85% Indian stocks and upto 15% US stocks should be a safe bet for investors.

Having said that we don’t agree with the choice of the fund benchmark. Nifty 100 TRI is a completely Indian index whereas the fund will have upto 15% exposure to US stocks, which virtually means it will be able to perform well in terms of alpha generation by using an sub-optimal yardstick.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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