{"id":26305,"date":"2023-01-25T11:30:00","date_gmt":"2023-01-25T06:00:00","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=26305"},"modified":"2023-01-25T11:59:46","modified_gmt":"2023-01-25T06:29:46","slug":"how-to-invest-in-indian-large-caps-active-or-passive","status":"publish","type":"post","link":"https:\/\/www.fundsindia.com\/blog\/mf-research\/how-to-invest-in-indian-large-caps-active-or-passive\/26305","title":{"rendered":"How to invest in Indian Large Caps &#8211; Active or Passive?"},"content":{"rendered":"\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Research-Call-Jan_Page-Banner.jpg\"><img loading=\"lazy\" width=\"1024\" height=\"512\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Research-Call-Jan_Page-Banner-1024x512.jpg\" alt=\"\" class=\"wp-image-26338\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Research-Call-Jan_Page-Banner-1024x512.jpg 1024w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Research-Call-Jan_Page-Banner-300x150.jpg 300w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Research-Call-Jan_Page-Banner-768x384.jpg 768w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Research-Call-Jan_Page-Banner-1536x769.jpg 1536w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Research-Call-Jan_Page-Banner-2048x1025.jpg 2048w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<h1><strong><span style=\"color:#0059fe\" class=\"has-inline-color\">The large-cap active vs passive debate&#8230; <\/span><br><\/strong><\/h1>\n\n\n\n<h3><strong>What was our earlier view on Active Large Cap Funds (in Dec-19)? <\/strong><\/h3>\n\n\n\n<h5>(<a href=\"https:\/\/fundsindia.com\/blog\/research-desk\/large-cap-funds-it-aint-over-till-its-over\/17269\">Blog Link<\/a>)<\/h5>\n\n\n\n<h4><span class=\"has-inline-color has-black-color\">High odds of Active Large Cap funds outperforming their Benchmark Nifty 100 TRI in the next 2-3 years (i.e between 2020-23)!<\/span><\/h4>\n\n\n\n<h4><strong>Reason 1: Mid &amp; Small Caps had significantly underperformed Large Caps over the previous 3 years and we expected this to mean revert<\/strong><strong><br><\/strong><\/h4>\n\n\n\n<ul><li>Active Large Cap funds usually have around <strong>10-20% of Mid &amp; Small Cap exposure. <\/strong>This had a negative impact on the performance of Large Cap funds compared to the pure-play Large Cap indices since the Mid &amp; Small Cap segments underperformed Large Caps in the previous 3 years.<\/li><li>However, historically Mid\/Small Cap vs Large Cap performance tends to be cyclical. <strong>We were expecting a trend reversal over the next 3-5 years where mid\/small caps outperform large caps.<\/strong><\/li><li>We expected Active Large Cap funds to have a positive upside from their Mid &amp; Small Cap exposure.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Midcap-150-TRI-over-Nifty-100-TRI-Apr-08-Nov-19.png\"><img loading=\"lazy\" width=\"752\" height=\"416\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Midcap-150-TRI-over-Nifty-100-TRI-Apr-08-Nov-19.png\" alt=\"\" class=\"wp-image-26316\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Midcap-150-TRI-over-Nifty-100-TRI-Apr-08-Nov-19.png 752w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Midcap-150-TRI-over-Nifty-100-TRI-Apr-08-Nov-19-300x166.png 300w\" sizes=\"(max-width: 752px) 100vw, 752px\" \/><\/a><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Smallcap-250-TRI-over-Nifty-100-TRI-Apr-08-Nov-19.png\"><img loading=\"lazy\" width=\"722\" height=\"434\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Smallcap-250-TRI-over-Nifty-100-TRI-Apr-08-Nov-19.png\" alt=\"\" class=\"wp-image-26317\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Smallcap-250-TRI-over-Nifty-100-TRI-Apr-08-Nov-19.png 722w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Smallcap-250-TRI-over-Nifty-100-TRI-Apr-08-Nov-19-300x180.png 300w\" sizes=\"(max-width: 722px) 100vw, 722px\" \/><\/a><\/figure>\n\n\n\n<h4><strong>Reason 2: Phase of extreme polarisation between 2017-2019 i.e few top stocks drove the index returns &#8211; led to the underperformance of diversified active large-cap funds. We expected this to mean revert. <br><\/strong><\/h4>\n\n\n\n<ul><li>Polarised markets refer to periods when few top stocks drive a large part of returns. Between 2017-19, Nifty 50 TRI returns saw significant polarisation \u2013 top 10 stocks drove a significant part of the returns. This led to the Nifty 50 TRI significantly outperforming the broad-based Nifty 50 Equal Weight TRI.<\/li><\/ul>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-TRI-Nifty-50-Equal-weight-TRI-returns-table-1-Jan-18-to-26-Nov-19.png\"><img loading=\"lazy\" width=\"476\" height=\"156\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-TRI-Nifty-50-Equal-weight-TRI-returns-table-1-Jan-18-to-26-Nov-19.png\" alt=\"\" class=\"wp-image-26318\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-TRI-Nifty-50-Equal-weight-TRI-returns-table-1-Jan-18-to-26-Nov-19.png 476w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-TRI-Nifty-50-Equal-weight-TRI-returns-table-1-Jan-18-to-26-Nov-19-300x98.png 300w\" sizes=\"(max-width: 476px) 100vw, 476px\" \/><\/a><\/figure><\/div>\n\n\n\n<ul><li>Due to the impact of polarisation, diversified Large Cap funds underperformed their benchmarks in the short run.<\/li><\/ul>\n\n\n\n<ul><li>However, over the long term, both Nifty 50 TRI and the broad-based Nifty 50 Equal Weight TRI indices had historically provided similar returns.<\/li><\/ul>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-TRI-Nifty-50-Equal-weight-TRI-returns-table-15-year-returns-CAGR-.png\"><img loading=\"lazy\" width=\"475\" height=\"154\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-TRI-Nifty-50-Equal-weight-TRI-returns-table-15-year-returns-CAGR-.png\" alt=\"\" class=\"wp-image-26319\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-TRI-Nifty-50-Equal-weight-TRI-returns-table-15-year-returns-CAGR-.png 475w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-TRI-Nifty-50-Equal-weight-TRI-returns-table-15-year-returns-CAGR--300x97.png 300w\" sizes=\"(max-width: 475px) 100vw, 475px\" \/><\/a><\/figure><\/div>\n\n\n\n<ul><li><strong>We expected this Extreme Polarisation in the Large Cap Index to mean revert and Active Large Cap funds to have a positive upside as the polarization reduces and returns get more broad based.<\/strong><\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-50-Equal-weight-TRI-over-Nifty-50-TRI-Jul-02-Nov-19.png\"><img loading=\"lazy\" width=\"794\" height=\"440\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-50-Equal-weight-TRI-over-Nifty-50-TRI-Jul-02-Nov-19.png\" alt=\"\" class=\"wp-image-26320\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-50-Equal-weight-TRI-over-Nifty-50-TRI-Jul-02-Nov-19.png 794w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-50-Equal-weight-TRI-over-Nifty-50-TRI-Jul-02-Nov-19-300x166.png 300w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-50-Equal-weight-TRI-over-Nifty-50-TRI-Jul-02-Nov-19-768x426.png 768w\" sizes=\"(max-width: 794px) 100vw, 794px\" \/><\/a><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-100-Equal-weight-TRI-over-Nifty-100-TRI-Jan-06-Nov-19.png\"><img loading=\"lazy\" width=\"768\" height=\"435\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-100-Equal-weight-TRI-over-Nifty-100-TRI-Jan-06-Nov-19.png\" alt=\"\" class=\"wp-image-26321\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-100-Equal-weight-TRI-over-Nifty-100-TRI-Jan-06-Nov-19.png 768w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-100-Equal-weight-TRI-over-Nifty-100-TRI-Jan-06-Nov-19-300x170.png 300w\" sizes=\"(max-width: 768px) 100vw, 768px\" \/><\/a><\/figure>\n\n\n\n<h4><strong>Did our rationale play out as per our expectations?<br><br><\/strong>Both views have played out as expected. <strong><br><\/strong><\/h4>\n\n\n\n<ul><li><strong>Mid &amp; Small Caps outperformed Largecaps<\/strong><\/li><\/ul>\n\n\n\n<p>Mid Caps started to outperform Large Caps as expected<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Midcap-150-TRI-over-Nifty-100-TRI-Apr-08-Dec-22-1.png\"><img loading=\"lazy\" width=\"786\" height=\"484\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Midcap-150-TRI-over-Nifty-100-TRI-Apr-08-Dec-22-1.png\" alt=\"\" class=\"wp-image-26322\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Midcap-150-TRI-over-Nifty-100-TRI-Apr-08-Dec-22-1.png 786w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Midcap-150-TRI-over-Nifty-100-TRI-Apr-08-Dec-22-1-300x185.png 300w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Midcap-150-TRI-over-Nifty-100-TRI-Apr-08-Dec-22-1-768x473.png 768w\" sizes=\"(max-width: 786px) 100vw, 786px\" \/><\/a><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-Midcap-150-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22.png\"><img loading=\"lazy\" width=\"707\" height=\"473\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-Midcap-150-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22.png\" alt=\"\" class=\"wp-image-26323\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-Midcap-150-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22.png 707w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-Midcap-150-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22-300x201.png 300w\" sizes=\"(max-width: 707px) 100vw, 707px\" \/><\/a><\/figure>\n\n\n\n<p>Small Caps started to outperform Large Caps as expected<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Smallcap-250-TRI-vs-Nifty-100-TRI-Apr-08-Dec-22-1.png\"><img loading=\"lazy\" width=\"794\" height=\"437\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Smallcap-250-TRI-vs-Nifty-100-TRI-Apr-08-Dec-22-1.png\" alt=\"\" class=\"wp-image-26335\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Smallcap-250-TRI-vs-Nifty-100-TRI-Apr-08-Dec-22-1.png 794w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Smallcap-250-TRI-vs-Nifty-100-TRI-Apr-08-Dec-22-1-300x165.png 300w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-Smallcap-250-TRI-vs-Nifty-100-TRI-Apr-08-Dec-22-1-768x423.png 768w\" sizes=\"(max-width: 794px) 100vw, 794px\" \/><\/a><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-Smallcap-250-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22.png\"><img loading=\"lazy\" width=\"680\" height=\"449\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-Smallcap-250-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22.png\" alt=\"\" class=\"wp-image-26325\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-Smallcap-250-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22.png 680w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-Smallcap-250-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22-300x198.png 300w\" sizes=\"(max-width: 680px) 100vw, 680px\" \/><\/a><\/figure>\n\n\n\n<ul><li><strong>Polarisation in the top 10 stocks reduced and performance got broad-based<br><\/strong><\/li><\/ul>\n\n\n\n<p>Nifty 50 Equal Weight TRI has outperformed Nifty 50 TRI as expected<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-50-Equal-weight-TRI-over-Nifty-50-TRI-Jul-02-Dec-22.png\"><img loading=\"lazy\" width=\"737\" height=\"436\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-50-Equal-weight-TRI-over-Nifty-50-TRI-Jul-02-Dec-22.png\" alt=\"\" class=\"wp-image-26326\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-50-Equal-weight-TRI-over-Nifty-50-TRI-Jul-02-Dec-22.png 737w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-50-Equal-weight-TRI-over-Nifty-50-TRI-Jul-02-Dec-22-300x177.png 300w\" sizes=\"(max-width: 737px) 100vw, 737px\" \/><\/a><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-Equal-weight-TRI-vs-Nifty-50-TRI-Dec-19-Dec-22.png\"><img loading=\"lazy\" width=\"647\" height=\"428\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-Equal-weight-TRI-vs-Nifty-50-TRI-Dec-19-Dec-22.png\" alt=\"\" class=\"wp-image-26327\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-Equal-weight-TRI-vs-Nifty-50-TRI-Dec-19-Dec-22.png 647w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-50-Equal-weight-TRI-vs-Nifty-50-TRI-Dec-19-Dec-22-300x198.png 300w\" sizes=\"(max-width: 647px) 100vw, 647px\" \/><\/a><\/figure>\n\n\n\n<p>Nifty 100 Equal Weight TRI has outperformed Nifty 100 TRI as expected<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-100-Equal-weight-TRI-over-Nifty-100-TRI-Jan-06-Dec-22.png\"><img loading=\"lazy\" width=\"780\" height=\"431\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-100-Equal-weight-TRI-over-Nifty-100-TRI-Jan-06-Dec-22.png\" alt=\"\" class=\"wp-image-26328\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-100-Equal-weight-TRI-over-Nifty-100-TRI-Jan-06-Dec-22.png 780w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-100-Equal-weight-TRI-over-Nifty-100-TRI-Jan-06-Dec-22-300x166.png 300w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-by-Nifty-100-Equal-weight-TRI-over-Nifty-100-TRI-Jan-06-Dec-22-768x424.png 768w\" sizes=\"(max-width: 780px) 100vw, 780px\" \/><\/a><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-100-Equal-weight-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22.png\"><img loading=\"lazy\" width=\"718\" height=\"419\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-100-Equal-weight-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22.png\" alt=\"\" class=\"wp-image-26329\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-100-Equal-weight-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22.png 718w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Nifty-100-Equal-weight-TRI-vs-Nifty-100-TRI-Dec-19-Dec-22-300x175.png 300w\" sizes=\"(max-width: 718px) 100vw, 718px\" \/><\/a><\/figure>\n\n\n\n<h4><strong>Did this translate into Large Cap Active fund outperformance?<\/strong><\/h4>\n\n\n\n<p>This is where we were surprised. Despite all the above factors turning favorable and the environment becoming conducive, Large Cap Active funds still underperformed Nifty 50 TRI.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-table-of-Active-large-cap-funds-Average-outperformace.png\"><img loading=\"lazy\" width=\"1024\" height=\"552\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-table-of-Active-large-cap-funds-Average-outperformace-1024x552.png\" alt=\"\" class=\"wp-image-26330\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-table-of-Active-large-cap-funds-Average-outperformace-1024x552.png 1024w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-table-of-Active-large-cap-funds-Average-outperformace-300x162.png 300w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-table-of-Active-large-cap-funds-Average-outperformace-768x414.png 768w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Outperformance-table-of-Active-large-cap-funds-Average-outperformace.png 1049w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<p><strong>While our rationale played out as expected, Active Large Cap funds are still struggling to outperform their Passive peers\u2026<\/strong><\/p>\n\n\n\n<p><strong>Confession time &#8211; we got our call wrong. <br><br>But what did we miss?<\/strong><\/p>\n\n\n\n<p><strong>&nbsp;<\/strong><\/p>\n\n\n\n<h1><strong><span style=\"color:#0059fe\" class=\"has-inline-color\">Two Challenges and the Cruel math of Outperformance<\/span><\/strong><\/h1>\n\n\n\n<p>While the environment did turn favorable for Largecap Active funds, we underestimated the high outperformance threshold set by <strong>two major challenges<\/strong>.&nbsp;<\/p>\n\n\n\n<h4><strong>Challenge 1: The Curse of Low Active Share (read as high portfolio overlap with index)<\/strong><strong><br><\/strong><strong>&nbsp;<\/strong><\/h4>\n\n\n\n<ul><li>Active share measures how much a fund\u2019s portfolio differs from its benchmark index. <strong>Higher the active share, higher the differentiated portfolio and hence better chances for outperformance<\/strong><\/li><li>As seen from the above table, <strong>all the funds (AUM &gt; Rs.1000 crs) have a low active share around 40% <\/strong>(barring DSP Top 100 Equity Fund).&nbsp; In other words,&nbsp; <strong>~60% of the portfolio for most Active Large Cap funds are similar to the index.<\/strong><\/li><li>This trend of low active share has been exacerbated by the SEBI categorization norms announced in 2018. This has narrowed the universe (at least 80% of the portfolio has to be in the top 100 stocks based on market capitalisation) and reduced the flexibility to increase mid and small-cap exposure in large caps as it is capped at 20% of the portfolio.&nbsp;<\/li><li><strong><span class=\"has-inline-color has-vivid-red-color\">This makes the task difficult for a fund manager as they have to outperform the index with just a small portion (~40%) of the differentiated portfolio.<\/span><\/strong><\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Active-share-vs-Nifty-50-table.png\"><img loading=\"lazy\" width=\"556\" height=\"529\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Active-share-vs-Nifty-50-table.png\" alt=\"\" class=\"wp-image-26331\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Active-share-vs-Nifty-50-table.png 556w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Active-share-vs-Nifty-50-table-300x285.png 300w\" sizes=\"(max-width: 556px) 100vw, 556px\" \/><\/a><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Active-share-vs-Nifty-100-table.png\"><img loading=\"lazy\" width=\"547\" height=\"521\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Active-share-vs-Nifty-100-table.png\" alt=\"\" class=\"wp-image-26332\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Active-share-vs-Nifty-100-table.png 547w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Active-share-vs-Nifty-100-table-300x286.png 300w\" sizes=\"(max-width: 547px) 100vw, 547px\" \/><\/a><\/figure>\n\n\n\n<h4><strong>Challenge 2: High Expense Ratio&nbsp;<\/strong><\/h4>\n\n\n\n<ul><li><strong>Active large caps are more expensive than passive funds &#8211; <\/strong>Average expense ratio of Active Large cap funds at 1.9% is significantly more expensive compared to passive funds (eg: UTI Nifty 50 Index fund at 0.3%). While some passive funds have higher expense ratios, our assumption is that with increasing competition you will find several funds at 0.3% expense ratio or lesser.&nbsp;<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Expense-ratio-differential-table-of-Active-large-cap-fund-vs-Nifty-50-100-index-fund-2.png\"><img loading=\"lazy\" width=\"994\" height=\"549\" src=\"https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Expense-ratio-differential-table-of-Active-large-cap-fund-vs-Nifty-50-100-index-fund-2.png\" alt=\"\" class=\"wp-image-26394\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Expense-ratio-differential-table-of-Active-large-cap-fund-vs-Nifty-50-100-index-fund-2.png 994w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Expense-ratio-differential-table-of-Active-large-cap-fund-vs-Nifty-50-100-index-fund-2-300x166.png 300w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Expense-ratio-differential-table-of-Active-large-cap-fund-vs-Nifty-50-100-index-fund-2-768x424.png 768w\" sizes=\"(max-width: 994px) 100vw, 994px\" \/><\/a><\/figure>\n\n\n\n<h4>\u2026<strong>Leading to the cruel math of outperformance<\/strong><\/h4>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Cruel-math-of-outperformance-table.png\"><img loading=\"lazy\" width=\"1024\" height=\"418\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Cruel-math-of-outperformance-table-1024x418.png\" alt=\"\" class=\"wp-image-26334\" srcset=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Cruel-math-of-outperformance-table-1024x418.png 1024w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Cruel-math-of-outperformance-table-300x123.png 300w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Cruel-math-of-outperformance-table-768x314.png 768w, https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2023\/01\/Cruel-math-of-outperformance-table.png 1415w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<ul><li>As seen from the above table, there is an average difference of 1.6% in expense ratio between actively managed Large Cap funds and Passive Index funds.&nbsp;<\/li><li>The differentiated portfolio (i.e active share) is also low at ~40%.&nbsp;<\/li><li>This increases the burden of an active fund manager, as the<strong> fund manager must provide an <span class=\"has-inline-color has-vivid-red-color\">outperformance of around 3-4% every year on the Active share portion<\/span> just to match the index returns.<\/strong><\/li><li>Further, the fund manager must provide<strong> an outperformance of around 5-7% every year on the Active share portion to actually beat the index by just 1%<\/strong>!!<\/li><\/ul>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h1><strong><span style=\"color:#0059fe\" class=\"has-inline-color\">Our Current View<\/span><\/strong><\/h1>\n\n\n\n<h3><strong><span class=\"has-inline-color has-vivid-red-color\">Odds are stacked against Active Large Cap Funds &#8211; Prefer Passive Large Cap Funds or Active Flexicap Funds<\/span><br><\/strong><\/h3>\n\n\n\n<ul><li><strong>Relatively high expense ratios and low active share<\/strong> make it <strong>extremely difficult <\/strong>for <strong>Active Large Cap funds<\/strong> to <strong>consistently outperform<\/strong> their <strong>passive peers<\/strong>. To put that into context, at the <strong>existing active share levels of ~40% <\/strong>and <strong>expense ratio differential of 1.6%<\/strong>, a large cap fund manager must provide<strong> an outperformance of around 5-7% every year on the Active share portion to actually beat the index by just 1%<\/strong>!!<\/li><\/ul>\n\n\n\n<ul><li>While there may be a few active large-cap funds that may still outperform (by using levers of increasing active share, concentrated portfolio, or contrarian approach), it will be <strong>behaviorally challenging<\/strong> to stick to these funds as the performance is expected to be cyclical and large outperformance may come in spurts following periods of underperformance.&nbsp;<\/li><\/ul>\n\n\n\n<ul><li>Given the above context, we prefer to <strong>gradually move out of Active Large Cap funds<\/strong> and instead invest in <strong>Passive Large Cap Index funds <\/strong>or <strong>Active Large Cap Biased Flexi Cap Funds <\/strong>(60-80% large caps with the flexibility to increase mid\/small cap allocation) for participating in the large-cap segment.<\/li><\/ul>\n\n\n\n<h4><strong>What will make us change our view?<\/strong><br><\/h4>\n\n\n\n<ul><li><strong>Increase in Active share: <\/strong>If the Active share of Active Large Cap Funds increases above 60%, we\u2019ll revisit our view<br><\/li><\/ul>\n\n\n\n<ul><li><strong>Lowering of Expense ratios: <\/strong>If the Expense ratio gap between Active &amp; Passive Large Cap fund reduces, we\u2019ll revisit our view<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image\"><img alt=\"\"\/><\/figure>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The large-cap active vs passive debate&#8230; What was our earlier view on Active Large Cap Funds (in Dec-19)? (Blog Link) High odds of Active Large Cap funds outperforming their Benchmark Nifty 100 TRI in the next 2-3 years (i.e between 2020-23)! Reason 1: Mid &amp; Small Caps had significantly underperformed Large Caps over the previous [&hellip;]<\/p>\n","protected":false},"author":37,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[506,509,376],"tags":[889,378,19,517,717,289,148,400,882,379,516,881,887,884,885,788,888,518,883,886],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v17.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How to invest in Indian Large Caps - Active or Passive?<\/title>\n<meta name=\"description\" content=\"High odds of Active Large Cap funds outperforming their Benchmark Nifty 100 TRI in the next 2-3 years (i.e between 2020-23)!\ufeff\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/fundsindia.com\/blog\/mf-research\/how-to-invest-in-indian-large-caps-active-or-passive\/26305\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How to invest in Indian Large Caps - 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