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Pockets of value

With the valuations of mid- and small-cap funds going through the roof, large-cap funds still look good in terms of valuations

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Most fund managers who are cautious about mid-cap stocks today believe that there are pockets of value in large caps. This is evident from the average portfolio price-earnings ratios of large-cap equity funds, which stood at 24.25 times at end-August. This is far lower than those for mid- and small-cap funds.

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Thanks to upbeat markets, large-cap equity funds have delivered a healthy 13.73 per cent CAGR in the last five years and 10.33 per cent in the last three. Lumpsum investments made five years ago have beaten SIP returns as the returns are measured from a market low. In the last three years though, SIPs have worked better.

The investible universe of large-cap funds is restricted to 150-200 stocks. In spite of this constraint, good large-cap managers have managed to beat their benchmarks by convincing margins in the last three and five years. The graduation of many mid-cap stocks to blue chips in this market move has lifted the average market capitalisation of the stocks held by the active funds, which now stands at over Rs 1.78 lakh crore.

Investors selecting funds in this category need to watch out for divergence in investment style (value or growth), flexibility to take cash calls and the fund's policy on concentration or diversification of holdings. Concentrated portfolios leaning towards the growth style have been in vogue in the last three years.

For first-time investors or more conservative investors looking to de-risk, large-cap equity funds presented here make a good portfolio addition.

We recommend the following large cap funds.

Birla Sun Life Frontline Equity Fund

DSP Blackrock Focus 25 Fund

ICICI Pru Focused Bluechip Equity Fund

Invesco India Business Leaders Fund

Motilal Oswal Most Focused 25 Fund

Quantum Long Term Equity Fund

Reliance Top 200 Fund

SBI Bluechip Fund

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