Large-caps give it safety amidst volatility

Markets witnessed a strong rally last year, pinning hopes on faster economic growth and, hence, better corporate earnings. But with a pick-up in growth still taking its own time and companies continuing to disappoint on the earnings front, markets have entered a volatile phase in the last two-three months.

Large-cap oriented funds are a good bet to tide over the current environment.

Investors with a low to medium risk appetite can buy units of SBI Magnum Equity. The fund steadily outperforms its benchmark, the Nifty. It also contains losses well in falling and volatile markets.

Strategy and performance

Across market cycles, Magnum Equity invests only in large-cap stocks (market capitalization of Rs.10,000 crore and above).

While this does not help if you are looking for chart-busting returns, it ensures safety, helping the fund hold steady in volatile or falling markets.

Besides, the fund deftly manages its asset allocation to suit market conditions. In the falling markets of 2011, for instance, the fund moved from holding 95 per cent in equities in the beginning of the year, to around 86 per cent towards the end.

It held up to 12 per cent in cash in this period. At the same time, Magnum Equity has been quick to latch on to rallies, outperforming both the Nifty and peers such as Franklin Bluechip and Kotak 50 in the 2012 and 2014 rallies.

Overall, Magnum Equity sports a track record of consistently beating the Nifty’s returns in one, three and five-year periods. Over these time frames, the returns have bettered the benchmark by 3-11 percentage points.

Portfolio

The fund churns sectors well, in tune with market preferences. Thus, while it stepped up on financial services and energy in the 2009-10 rally, it took refuge in defensive sectors such as pharma and consumer non-durable in 2011 and 2013.

It rightly rode auto and banking in the 2014 rally.

Magnum Equity sometimes takes concentrated bets in some stocks. While this approach may peg up the risk a bit, considering that these bets are on top index stocks, it lends stability and lowers volatility. In the last one year, for instance, the fund held 8-10 per cent in stocks such as ICICI Bank, HDFC Bank and Reliance Industries.

The fund has also gained from top picks outside the Nifty basket such as Motherson Sumi, Eicher Motors and Pidilite Industries in the last 12 months. Stocks entered into recently include promising bets such as IndusInd Bank and Coal India. Recent exits are Cummins and Colgate Palmolive, perhaps based on their high valuations after the run-up of the last one year.