Large-caps provide stability, liquidity, especially in times of stress when mid- and small-caps may find it difficult to deliver. This is what makes them a safe bet for most investors

As small- and mid-caps keep gaining momentum, resulting in the feeling that valuations are quickly getting stretched, a section of investors is keen on accumulating large-caps. Their rationale: balance the scales once again with stocks that are now being considered too tardy to add any meaningful value to portfolios.

In the days to come, large-caps are expected to bolster those who have almost entirely focused on the mid-and small-cap segments.

The proponents of the logic refer to recent advances recorded by smaller, medium-sized counters, irrespective of sectors. Their prices have gained handsomely, triggering a round of profit booking. This has generally eluded the larger stocks, many of which have appeared slow-paced in comparison over the same timeline. Further, a section of the market has stayed away from large-caps and, at best, remained neutral on a range of such stocks during this period.

The situation, it is felt, has already resulted in dis-balance, thanks to significant over-emphasis on small-and mid-caps. While it is too early to predict whether large-caps will really get a better treatment, there are several compulsions that are working in their favour.

Perceptions Of Necessity

But why should our portfolios generously accommodate large-caps at all? Can we not derive value from stocks in other market-cap classifications? Though such posers are not so easy to address, I will try to summarise the reasons. First, large-caps help in ironing out a few sharp creases. In other words, the average investor’s portfolio needs the kind of stability that large-caps often provide.

Second, large-caps do not suffer from issues related to liquidity, and third, such stocks actually drive returns during periods of stress. When mid- and small-caps do not deliver, it is up to their large counterparts to push performance.

Can you imagine an ordinary portfolio without heavy-duty embellishments, such as Reliance, State Bank of India, Infosys, Hindustan Unilever or Maruti Suzuki? I am not playing favourites here; the companies being cited here serve as mere examples. These stocks are chart-busters in more senses than one, accounting for mega weightages in the major indices. They make the grade in terms of investor interest (reflected in trading volumes). Many of the companies in the list are true bluechips, offering growth and dividend income to loyal shareholders. For the latter, consistency is an essential trait.

It is easy to deduce that large-caps are among the toughest entities in the expanding investment universe. A look at the large-cap index will disabuse us of any idea to the contrary.

Check the NSE Nifty, the 50-share index that many investors identify with so closely. No discussion on the Indian market can be complete without any references to this bellwether. Indeed, our stock market relies heavily on this very popular benchmark.

The super-cap stocks comprising the Nifty, which may be functionally regarded as the first 50 companies in the market-cap rankings, are chased by heavyweight investors from around the world. Domestic investors are no less focused, a trend that largely supports gigantic valuations of these companies. All told, these mega companies together amount to both stability and growth.

Growth First

One of the most compelling factors serving the cause of large-caps is growth prospect, especially across various market cycles. Investors who seek long-term wealth find large-caps to be a very attractive proposition. Many participants accumulate and hold these stocks for long stretches. The idea is to optimise returns and leverage growth opportunities. This has been observed many times in the past; handsome gains have been recorded by committed investors with large-cap holdings. The trend will continue, an influential section of the market will remain loyal to large-caps, notwithstanding all the lure of small- and mid-caps.

Nifty and Sensex, the two best-known indices in our capital markets, have proved their mettle across business cycles. Let me quote figures furnished by NSE to justify my case. The Nifty, as on November 15, 2023, stood at 19,675.45, up from 18,329.15 exactly a year ago. Note its 52-week high, which was 16,828.35 points. This translates to affirmative news for market observers. As for advocates of large-caps, the story of the index remains a rather compelling tale.

I will, however, add a couple of caveats in this context.

• Yes, all large-caps are powerful stocks. But not all of them have advanced as sharply as some of the smartest gainers.
• A few names are still waiting in the wings. These will be re-rated over the course of time. Investors, therefore, need to wait in order to maximise their returns.

Battle Tactics

• Is there a case for a new allocation pattern insofar as large-caps are concerned? I will argue in favour of a fresh, or at least a revised strategy here. Let the reader chew on the following points.
• It’s impossible to prescribe a single formula for large-caps. Some sections, it is believed, have a simple rule of 25 per cent which means that at least a fourth of their portfolio should be invested in large-cap. This is a fairly conservative approach, but an unwavering principle for them.
• No, there can never be a universal metric. I do not wish to suggest that you should stash 25 per cent in large-caps or whether 75 per cent will be a safer idea.
• Remember your risk profile. If you are a risk-taker, smart alternatives (other than in large-caps) should appeal to you.
• Do you want a stack of large-caps comprising the best-known stocks? It is not difficult to construct a diversified portfolio of such stocks. For this, you may like to consider the first 50 or 100 stocks.
• Don’t want to allocate directly to stocks? Well, you may consider large-cap funds instead. Let a trained fund manager use his skills to derive returns on your behalf. You may well make a one-time allocation and supplement it by doing it systematically every month through the systematic investment plan (SIP) mode.
• Index funds will have a special status going forward. If investors want to narrow down their options, let them choose index funds mirroring the Nifty or the Sensex.

An index fund must track the underlying index as closely as possible. It does not aim to outperform the underlying index. A huge community of investors in various markets across the world follow index funds. Such funds enjoy a modest following in India, too. It is predicted that indexing will soon be accepted as a fundamental strategy.

In sum, we may well need to re-assess and re-organise our positions vis-a-vis large caps.

By Nilanjan Dey, Director, Wishlist Capital