The truth about large cap funds: Part II

It is fair to expect that the large cap index will generate a steady rate of return over long periods of time, without much ado

Abaneeta Chakraborty
Published: 03, Aug 2018

Abaneeta is the Founder of ABANWILL CONSULTANTS LLP, a firm that was formed to provide independent views on investing and make an impact in the field of Financial Services. She draws her inspiration to write on the subject of wealth management from her 16 years in the Industry where she has worked with Banks, NBFCs and a Multi Family Office. She is a qualified Finance professional. She has also independently developed a course called “Marketing of financial services” that is taught at the Praxis Business School since the last 5 years. Abaneeta can be reached at consult@abanwill.com

Image: Shutterstock
Image: Shutterstock

In Part I, we saw how actively managed large cap funds, as a category have not beaten the benchmark at all. However, when an equity portfolio is constructed, the core portfolio must have large caps for stability.

I hope you are not working with an advisor who is asking you to buy only small or midcaps.

Introduction to Beta When equity markets are rising continuously, there is something called upward momentum, much of the returns happen ‘due’ to that momentum. It is akin to be washed ashore by currents in the sea, and does not have much to do with whether you can swim or not. The opposite can be held true as well.

This phenomenon is called Beta. You may often come across this word in financial literature. It is used while referring to the volatility of the market in general. One can’t wish away Beta, but the flip side is that if you stay invested in equities, you can expect what the market generates.

Actively managed large cap funds, then, on an average have not been able to give us even Beta returns.

So, what is the solution?

If one has faith in the growth of the country then it is safe to expect that the largest companies that do business in the country will do well. Consequently, it is fair to expect that the large cap index will generate a steady rate of return over long periods of time, without much ado.

Passively managed index funds as I have explained earlier, lazily track the index, charge a much smaller asset management fee and may just work as a great substitute to at least this category of actively managed large cap funds.

Then there are ETFs. Exchange traded funds, that track the index and allow you to buy into the index at any time of the day. They differ with index funds in that; Index funds calculate the net asset value (NAV) at the end of the day. At this point in time most index funds have a higher asset management fee than most ETFs.

In some countries, the debate on active vs. passive funds has gained ground. In our country, people who speak about passive investing are not very popular. In fact, some fund managers get very angry when they are challenged on the creation of outperformance. I am particularly very troubled about becoming unpopular, so I am not going to say much more.

Do the rational thing, connect with your advisor and make the right choice for yourself.

The author is the Founder of ABANWILL CONSULTANTS LLP, a firm that was formed to provide independent views on investing and make an impact in the field of Financial Services.

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