Most equity mutual funds are investing mostly in large cap stocks. Should you worry?

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You can love them or hate them. However, you just can’t avoid them. We are talking about large cap stocks here. You may be avoiding investing in large cap schemes because they offer modest returns and investing in multi cap funds, flexi cap funds, focussed funds, contra funds, value funds, and so on to earn better returns. However, if you look at the portfolio composition of these schemes, you would notice that most of them are investing mostly in large cap stocks.

As per Sebi classification, there are around 10 equity mutual fund categories in India. Apart from mid cap and small cap categories, the rest of the eight equity categories had higher allocation in large cap stocks. The focused fund category had the highest allocation of around 63.93% in large cap stocks.

Consider flexi cap funds. Flexi cap funds are recommended to moderate investors to create wealth over a long period. The fund managers of these schemes have the freedom to invest across market capitalisations and sectors/themes based on his outlook on the market. So far so good. However, where do these schemes invest the most? According to ACE MF, the flexi cap category held 58.25% of their assets in large cap stocks, 18.32% in mid cap stocks, and 13.83% in small cap stocks.

Among 36 flexi cap schemes in the market, HDFC Flexi Cap Fund held the highest allocation in large cap stocks. The schemes held around 80.38% in large cap stocks,and 6.47% and 3.17% in mid cap and small cap stocks respectively.

Let us move to the focused fund category. The category which invests in a concentrated portfolio of 30 stocks had an average allocation of 63.93% in large cap stocks. Among 27 schemes in the category, UTI Focused Equity Fund had the highest allocation in large cap stocks. The scheme held 83.66% in large cap stocks, 12.05% in mid cap stocks and 2.15% in small cap stocks. Aditya Birla Sun Life Focused Equity Fund had 83.51% allocation in large cap stocks.

The contra fund category on an average had around 54.73% investments in large cap stocks. As per SEBI norms, these schemes follow a contrarian investment strategy with a minimum investment of 65% of total assets in equity and equity related instruments. The value fund category held an average 55.67% investments in large cap stocks, followed by 14.96% and 20.80% in mid cap and small cap stocks. The ELSS category also had an average of 62.34% in large cap stocks. The category has an average allocation of 19.71% and 14.69% in mid cap and small cap space. As said in the beginning, your scheme is likely to have substantial holdings in large cap stocks. It really doesn’t matter which category you are investing in (See table). According to mutual fund advisors, mutual fund managers always bank on large cap stocks whenever the market is volatile or in the expensive territory. This may be according to the strategy of the fund manager, and investors need not bother about it beyond a point.

ETMutualFunds considered equity categories such as large & mid, multi cap, ELSS, flexi cap, focused fund, value and contra fund categories for the analysis. We considered the portfolio for the month of August (the last available data). We considered regular and growth option schemes for the analysis.

One should not make investment or redemption decisions based on this exercise. One should always consider risk appetite, investment horizon, and goal while choosing a scheme.

If you are looking for recommendations, see:
Best mutual funds to invest in 2023