The equity market is passing through a very challenging environment this year. High inflation, rising interest rates, tightening liquidity, weakening Chinese economy and currency and the War in Ukraine have created significant headwinds for equity as an asset class. Heavy FII selling of Indian equities have continued unabated for the last few months.
The Nifty is down nearly 15% (as on 16th May 2022) from its 52 week. The broader market has seen deeper cuts, with the Nifty Midcap 150 down 17% (as on 16th May 2022) from its 52 week high. The sharp correction has brought down valuations both in the large cap and midcap segments. This may provide a good investment opportunity for investors with long investment horizons.
In this article, we will review, Sundaram Large and Midcap Fund which has been the best performing large and midcap fund over the last one year (Top Performing Mutual Funds (Trailing returns) - Equity: Large and Mid Cap).
What are large and midcap funds?
As per SEBI requirements, large and midcap fund must have minimum 35% allocation to large cap (top 100 stocks by market capitalization) and 35% allocation to midcap stocks (101st to 250th stocks by market capitalization). While the minimum large cap allocation potentially ensures a degree of stability in volatile market conditions, the mandate for these funds provide enough flexibility to fund managers to position their portfolios for long term capital appreciation by identifying attractive investment opportunities across different market cap segments and industry sectors. As such, large and midcap funds are good investment choices for long term financial goals for investors with high to very high risk appetites.
Sundaram Large and Midcap Fund Overview
Sundaram Large and Midcap Fund, was launched in February 2007 and has Rs 5,017 Crores of assets under management. The expense ratio of the scheme is 1.86% (Regular plan). The scheme has given 13.62% CAGR returns since inception and is managed by Mr. Ravi Gopala krishnan and Mr. Ashish Aggarwal. The chart below shows the growth of Rs 1 lakh investment in the scheme over the last 1 year versus its benchmark index Nifty Large and Midcap 250 TRI.
Source: Advisorkhoj Research
Performance versus category and different asset classes
The chart below shows the performance of Sundaram Large and Midcap Fund versus its scheme category and various asset classes over different time-scales. The scheme has outperformed the category average returns across all long term (1 year+) time-scales. It has also mostly outperformed the other asset classes over longer investment periods
Source: Advisorkhoj Research
Cause of recent underperformanc versus benchmark
You can see in the chart above that Sundaram Large and Midcap Fund underperformed versus its scheme benchmark over the last 6 months or so. The cause of this underpeformance is the difference in composition of the scheme holdings and benchmark holdings. Nifty Large and Midcap 250 Index is a market cap weighted index. As per AMFI data (31st December 2021) on large, mid and small cap stocks, the weightage of large cap stocks in Nifty Large and Midcap 250 Index is nearly 80% and weightage of midcap stocks is around 20%.
This weightage large cap stocks in the index may have gone up further in the last 4 – 5 months because midcaps lost more market cap compared to large caps in this round of correction (midcaps have historically underperformed large caps in bear markets). Sundaram Large and Midcap Fund is mandated by SEBI to have minimum 35% allocation to midcap stocks. The higher allocation to midcaps has resulted in underpeformance.
However, historical data shows that midcap stocks have the potential to outperform large caps over long investment horizons. Over the last 10 years ending 13th May 2022, Nifty Midcap 150 TRI has given 18.3% CAGR returns, while Nifty 100 TRI has given 14.2% CAGR returns. The correction in midcaps has now provided investors with an opportunity to invest at lower prices (valuations).
The chart below shows the 3 year rolling returns of Sundaram Large and Midcap Fund versus the large and midcap category average over the last 10 years. You can see that the scheme was able to consistently beat the category average returns.
Source: Advisorkhoj Rolling Returns calculator
Wealth Creation - SIP Returns
The chart below shows the returns of Rs 10,000 monthly SIP in Sundaram Large and Midcap Fund over the last 10 years. You can see that with a cumulative investment of Rs 12 lakhs through SIP, you could have accumulated corpus of over Rs 31 lakhs in the last 10 years. The fund gave over 18% XIRR returns. This shows the wealth creation of the scheme over long investment horizons.
Source: Advisorkhoj Research
Why invest in Sundaram Large and Midcap Fund?
- Though the near term outlook is uncertain due to inflation, interest rates etc, the long term outlook on Indian equities is promising with clear signs of growth revival in the economy.
- The large cap portion (minimum 35%) of the scheme can provide resilience in highly volatile market, while the midcap portion can create alphas for investors over long investment tenures.
- The scheme has a strong track record of wealth creation. Sundaram Mutual, as an Asset Management Company, also has a strong track record in creating alphas in the mid and small cap segments.
Who should invest in Sundaram Large and Midcap Fund?
- Investors looking for capital appreciation and wealth creation.
- Investors should have at least 5 year investment horizon in this scheme.
- Investors with high to very high risk appetites.
- You can invest in this scheme through SIP for your long term financial goals.
- You can also tactically invest in lump sum in deep corrections, provided you have an investment horizon of at least 5 years or longer.
- If you are worried about volatility in the short term, you can invest in Sundaram Money Market Fund and transfer fixed amounts from the liquid fund to Sundaram Large and Midcap Fund over the next 6 to 9 months using the Systematic Transfer Plan (STP) facility.
- Investors should consult with their financial advisors if Sundaram Large and Midcap Fund is suitable for their investment needs.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.