There is enough historical data to prove that Large companies or large cap funds perform better during difficult market and economic conditions. However, in last 3 years, Small and Mid-cap equity funds have given returns that are roughly 3 times the large cap Funds. This is large because small and mid-cap were severely beaten down when the new Modi led Government took charge. They rallied not as much on fundamentals but mainly on “valuations catch up “.
Look at the past returns of small, Mid and large-cap funds :
BSE Mid and Small Cap indices are well over their respective all-time highs and surely seem overpriced. In last 2 years sensex has generated an absolute return of just 31%, while the mid and small-cap indices have generated an absolute return of 88% and 99% .
Now the moot point is what next? We at Mutualfundwala, believe that going forward large companies will generate better returns as compared to small and mid-cap. The reasons are simple and obvious. Firstly, a Large cap is undervalued. Trailing PE (price to Earning) of NSE 50 is around 19 whereas that of NSE Midcap 50 is over 40. Secondly, large companies have 30% idle capacity. That means they can produce more without capital expenditure. This is welcome situation considering increased demand and consumer sentiment. Lastly, Banking sector has increased its lending to large companies. So, If you are looking for undervalued stocks, there are far more opportunities in the large-cap space.