This year, active large-cap funds proved they haven't lost the plot yet. Owing to several regulatory changes in the last couple of years, active funds playing in the large-cap space struggled to generate alpha. However, this year's broad-based rally has not only revitalised them but has also enabled them to outpace the BSE 100 index by an impressive 170 basis points (1.7 per cent). While the standalone returns of large-cap funds showcase an impressive performance this year, they find themselves in the shadows of mid-cap and small-cap segments, which have delivered twice as much as them. Nonetheless, for conservative equity investors or first-time investors, large caps remain the most suitable as they are far less volatile than mid-cap and small-cap funds. Passives attract more investors Their rather tepid show in the last few years combined with the eye-popping performance of small- and mid-cap companies have led to significant outflows from active funds in the last six months. That said, index funds continue to garner investor interest and attract inflows. Active large-cap funds have witnessed exodus in the last six months Period Net flows of active funds (Rs cr) Net flows of index funds (Rs cr) Jan'23 - May'23 289 6654 Jun'23 - Nov'23 -2777 7329 Based on Value Research estimates While there is no harm in choosing the passive route to your large-cap investing, side with a broader index and stay away from factor-based passive funds (also known by the name smart-beta funds). These funds have a narrower mandate, making them similar to investing in a theme, which can be unnecessarily volatile. In addition, it's difficult to predict which factor would perform best in a given year. Similar thoughts were echoed by Gaurav Misra, Co-Head Equity, Mirae Asset Investment Managers (India) Pvt. Ltd. in our recent conversation with him. Gaurav Misra, Mirae's Co-Head, on smart-beta funds: Frankly, a lot of it is manufacturer-led (AMC-led), and the desire is to create products and options for investors. It can do well when certain factors are successful at certain times. It is difficult to confidently say which one will work this year or the next
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