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Principal Large Cap Fund: How good is it?
September 30, 2005
|Type||Open ended equity (diversified)||Benchmark||S&P CNX Nifty|
|Min. Investment||Rs 5,000 ||Face Value||Rs 10 |
|Entry Load||2.25% (maximum)||Exit Load||0.50%*|
|Issue Opens||September 23, 2005||Issue Closes||October 19, 2005|
|*For investments between Rs 30m to 50m, on exit within 3 months.|
The Investment Objective of the scheme would be to provide capital appreciation and/or dividend distribution by predominantly investing in companies having a large market capitalization.
For the purpose of this Fund, Large Cap Companies are defined as those having market capitalization greater than Rs 750 crore as on the date of investment (or any such amount as may be specified by India Index Services Limited (IISL) from time to time) being the upper limit of market capitalisation as a criteria for inclusion of a company in CNX Midcap 200 Index. However, should IISL come out with a definition of 'Large Cap companies', the same will be utilized.*
*Source: Offer Document
Principal Large Cap Fund (PLCF) is an open-ended diversified equity fund which seeks to invest in fundamentally strong companies with a large market cap. After a deluge of flexi cap and mid cap funds, PLCF could be among the early entrants to what might be next 'big story' with fund houses i.e. large cap funds. Large cap funds typically invest in established stocks which are well-researched and have a consistent track record. As a result, they are equipped to offer a degree of stability to the investor's portfolio.
PLCF is likely to be a medium - high risk investment proposition within the diversified equity funds segment. Despite being positioned as a large cap fund, PLCF's investment objective is fluid enough to accommodate stocks outside of the large cap segment. Investors whose portfolios are dominated by flexi cap/mid cap funds can consider investing in PLCF to add a conventional large cap fund to their portfolios. However we recommend that investors first consider making investments in existing predominantly large cap funds with steady track records like Franklin India Bluechip, HDFC Equity or PLCF's sibling Principal Growth.
The information available on PLCF's choice of stocks in terms of market capitalisation is dichotomous.
The promotion/sales literature distributed by the fund house states that the fund will predominantly invest in stocks having a market capitalisation equal to or greater than Rs 3,500 crores i.e. Rs 35 bn (to be reviewed periodically in-line with market levels), representing truly large cap stocks. A small part of the portfolio could be invested in the stocks having a lower market capitalisation but not lower than Rs 2,000 crores (i.e. Rs 20 bn).
Conversely, the offer document pegs Rs 750 crores (i.e. Rs 7.5 bn) as the base limit for large cap stocks' market capitalisation. The disparity between the two definitions of large cap stocks is perplexing and can be a cause for concern as well.
|Large cap equity & equity related instruments||65%-100%|
|Equity and equity related instruments other than above||0%-35%|
|Money market instruments||0%-30%|
As can be seen from the table above, 'large cap' stocks will always account for atleast 65% of the fund's portfolio. The fund manager has been granted flexibility to invest upto 35% of the corpus in stocks other than large caps; similarly money market instruments can account for 30% of PLCF's assets.
Rajat Jain is the CIO - Principal PNB Asset Management Company Private Limited. He holds a degree in Mechanical Engineering and a Diploma in Management from IIM - Lucknow. Mr. Jain has been associated with SBI Mutual Fund where he was the CIO. Prior to that, he worked in the investment function in various capacities including as a Fund Manager, Head of Research and Equities Dealer. He manages Principal Equity Fund and Principal Balanced Fund.
Equity funds from Principal Mutual Fund have traditionally been known for their ability to deliver stable returns and performance on the risk-adjusted return front. We believe PLCF will live up to this lineage. While it may not outperform its large cap peers on the returns parameter, the fund (powered by the presence of predominantly large cap holdings and a stable fund management style) looks equipped to emerge as a stable performer.
However if PLCF uses the definition stated in the investment objective (65%-100% in stocks with a market capitalisation of more than Rs 750 crore) for stock selection of large caps, as opposed to that in its sales literature (equal to or greater than Rs 3,500 crore), then there will be a need to review the fund's positioning and performance outlook.
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