Dont Make Reliance Industries the Scapegoat
Over the past six months, large-cap dedicated funds have underperformed their benchmark by a good margin. One of the reasons for such underperformance is the outperformance of Reliance Industries that has led to an increase in its weightage in Nifty 50 to almost 15 per cent. Now due to regulatory norms, a fund cannot have exposure to a single stock of more than 10 per cent. Therefore, many large-cap funds could not benefit from the rise of Reliance Industries and hence are underperforming.
I do not see any merit in this reasoning if we look at the historical performance of the large-cap-dedicated funds. According to data published by S & P Indices Versus Active (SPIVA) India Scorecard, for the five-year period ending December 2019, 82.29 per cent of Indian equity large-capdedicated funds have underperformed. During this period there was no company that has had such an outsized weightage in the index. Besides, looking at the holdings of large-cap funds for the month of September 2020, almost three-fourths of the funds have not reached 10 per cent capitalisation in a single stock.
Besides this, it is expected from an active fund management to find opportunities beyond the benchmark to beat the benchmark returns. In case of large-cap funds, only 80 per cent is needed to invest in large-cap and the rest 20 per cent can be used to apply on ideas that generate superior returns. In addition to all of the above, history also teaches us something important. At the end of the year 2007, Reliance Industries had a weightage of 12.15 per cent in Nifty and Reliance Petroleum, which later on got merged with Reliance Industry, had weightage of 2.41 per cent.
The combined entity had weightage of 14.56 per cent. Fastforward to December 2015 when the weightage of Reliance Industry in the index dropped to only 5.91 per cent. Therefore, 10 per cent capitalisation, I believe, should be sacrosanct and the recent performance should not be extrapolated. Funds may not have an option but readers can always invest in large-cap-based ETFs that will help you to get returns similar to the benchmark. Our cover story this times dives deep into everything that you wanted to know about ETF investments.
SHASHIKANT