Study shows large-cap funds are better bet for long-term investment

Top performers focus on blue-chip stocks, attract fresh inflows.

If you are looking to outperform the indices, then plan to hold your equity fund for the long term and stick to funds that invest in blue-chip stocks.

That seems to be the lesson from the 10-year performance of open-end equity funds that have a long track record. 58 of the 360 plus equity funds in India have been in existence for ten years or more.

These funds averaged a return of nearly 13 per cent (compounded annually) over the ten-year period, beating the Sensex and Nifty (11 per cent) and easily outpacing the broader BSE 100 (9 per cent).

Ten-year funds do better
Nearly 62 per cent of the funds (36 in number), beat the Sensex returns over a ten-year period. Only 45 per cent of the equity funds have bettered the Sensex over a shorter five-year period. This number drops to 40 per cent over a three-year time frame. This indicates that funds with a longer record have improved the investor's chance of beating the index.

Diverging returns
Top performers such as Reliance Growth and Vision, HDFC Equity and Tata Equity Opportunities have delivered returns as high as 20-25 per cent on annualised basis over the past ten years.

However, the return divergence between the top performers and the laggards was huge. SBI Magnum Infotech Fund — a fund based on the technology theme launched during the tech stock boom of 1999 — has actually seen its NAV erode by 5 per cent a year.

The other key trend is that the list of top performers is dominated by funds that focus on large-cap stocks — Reliance Vision, HDFC Equity Fund, Tata Equity Opportunities, HDFC Top 200 and Franklin Bluechip.

That goes against the common investor perception that it is mid- and small-cap funds that outperform the long-term ones. A few of the mid-cap funds such as Franklin Prima, JM Basic and Tata Life Sciences and Technology managed to make it to the list.

A few funds in the list also have a flexi-cap approach and move between mid- and large-cap stocks.

Asset growth
One significant finding is that funds that performed exceedingly well over the past ten years were able to attract fresh inflows as well.

For instance, HDFC Equity and HDFC Top 200 opened the decade with an asset size of just Rs 31 crore and Rs 85 crore respectively, but their assets had grown manifold to Rs 5,400 crore and Rs 6,086 crore respectively by end-January 2010.

That these funds saw investors putting in money is clear from the asset size growing more than the funds' NAV. Over a ten-year period, HDFC Top 200 Fund's NAV has grown at a compound annual return of 20.5 per cent, whereas its assets grew by 53 per cent. HDFC Equity saw assets grow by 67 per cent while NAV grew by 23 per cent a year.

However, some of the big names have seen a shrinkage in assets, due to sedate performance from their funds. At the start of the decade, investors pumped money into equity funds based on the lineage of the fund house, but over time it was performance that mattered. JM Basic Fund which started the decade with an asset size of Rs 943 crore saw this fall to Rs 589 crore by January. During the same period, its NAV, after hitting a high, moved back to the same level.

Source: http://www.thehindubusinessline.com/2010/02/22/stories/2010022251410100.htm