The Alchemy! How fund managers' craft in supercharging large cap funds with mid and small-cap magic

The landscape for large-cap funds has seen a significant shift, with a notable turnaround in their performance. Following a period of struggle in surpassing benchmark indices between 2018 and 2022, large-cap funds have demonstrated a resurgence post-2022. Bolstered by a robust equity market in 2023, ACEMF data reveals that two-thirds of actively managed large-cap funds have outperformed their benchmarks.

The key to this success lies in the strategic management of the 20% portion of their corpus, which fund managers are permitted to invest outside the large-cap domain. Seizing upon opportunities, these managers delve into small- and mid-cap stocks, aiming to capitalize on their potential for enhanced returns. Recent data indicates substantial allocations within the large-cap category, with significant sums directed towards mid and small-cap stocks.

These carefully selected mid and small-cap stocks serve to augment the returns of large-cap funds, thereby positioning them favorably against benchmark indices.

Highlighting the most favored mid-cap stocks among 31 active large-cap funds, portfolio data sourced from ACEMF as of March 31, 2024, sheds light on the following:

Samvardhana Motherson International: Held by 12 large-cap funds, including DSP Top 100 Equity, Groww Largecap, and SBI BlueChip.

Hero MotoCorp: Supported by 10 large-cap funds, such as JM Large Cap, ICICI Pru Bluechip, and Bank of India Bluechip.

Info Edge (India): Attracting investment from 9 large-cap funds, including Taurus Large Cap, Axis Bluechip, and UTI Large Cap.

The Indian Hotels Company: Backed by 8 large-cap funds, including Nippon India Large Cap, Baroda BNP Paribas Large Cap, and PGIM India Large Cap.

Cummins India: Garnering support from 7 large-cap funds, such as Groww Largecap, SBI BlueChip, and Union Largecap.

Additionally, other mid-cap stocks witnessing substantial interest from large-cap funds include The Phoenix Mills, PI Industries, Sona BLW Precision Forgings, FSN E-Commerce Ventures, and Zydus Lifesciences.

This strategic allocation to mid and small-cap stocks underscores the proactive approach adopted by fund managers to potentially enhance returns and outperform benchmarks in the evolving market landscape.