WHAT ARE DIVERSIFIED LARGE CAP FUNDS?
Another category of equity funds is the diversified large cap funds. These are funds which restrict their stock selection to the large cap stocks – typically the top 100 or 200 stocks with highest market capitalization and liquidity. It is generally perceived that large cap stocks are those which have sound businesses, strong management, globally competitive products and are quick to respond to market dynamics. Therefore, diversified large cap funds are considered as stable and safe. However, since equities as an asset class are risky, there is no guaranteeing returns for any type of fund. These funds are actively managed funds unlike the index funds which are passively managed.
In an actively managed fund the fund manager pores over data and information, researches the company, the economy, analyses market trends, takes into account government policies on different sectors and then selects the stock to invest. This is called as active management. A point to be noted here is that anything other than an index funds are actively managed funds and they generally have higher expenses as compared to index funds. In this case, the fund manager has the choice to invest in stocks beyond the index. Thus, active decision making comes in. Any scheme which is involved in active decision making is incurring higher expenses and may also be assuming higher risks. This is mainly because as the stock selection universe increases from index stocks to largecaps to midcaps and finally to smallcaps, the risk levels associated with each category increases above the previous category. The logical conclusion from this is that actively managed funds should also deliver higher returns than the index, as investors must be compensated for higher risks. But this is not always so. Studies have shown that a majority of actively managed funds are unable to beat the index returns on a consistent basis year after year. Secondly, there is no guaranteeing which actively managed fund will beat the index in a given year. Index funds therefore have grown exponentially in some countries due to the inconsistency of returns of actively managed funds.