How Can Large Cap Funds Outperform Market Indices?

​In the Indian stock market, large-cap funds—investments in companies with substantial market capitalizations—have garnered significant attention from investors seeking stability and growth. These funds often serve as a barometer for market performance, given their representation of leading industry players.

But this leads to further questions, like: can large-cap funds consistently outperform established market indices? In this article, we discuss the ways large-cap funds have the potential to outperform market indices.

What are Large Cap Funds?

​Large cap funds are types of mutual funds that invest primarily in the equity shares of large cap firms, i.e. the top 100 firms by market capitalization in India.

These companies are well-established with a history of stable performance.

By allocating at least 80% of the capital to these firms, large cap mutual funds offer some level of safety for investors while offering them consistent returns at the same time.

Read More: Factors To Consider While Investing In Equity Mutual Funds

Market Indices in India

In India, stock market indices like Nifty 50 and Sensex monitor the performance of a selected group of stocks from different sectors.

Nifty 50 tracks the performance of the 50 largest listed companies, and Sensex tracks the 30 top listed companies. These indices act as benchmarks to measure overall market performance.

Investors often use them to gauge the health of the stock market and compare the performance of individual funds or portfolios against these indices.

Factors Leading Large Cap Funds to Outperform Market Indices

Here are the reasons that help large cap funds to outperform market indices:

1. Active Management and Stock Selection

Fund managers of large cap funds conduct thorough analysis and research to select stocks.

This strategy helps them to locate stocks that are either undervalued or are very likely to increase in value. Thus, helping them achieve competitive gains over those provided by passive market indices.

For instance, in 2024, 83% of active large-cap funds outperformed the BSE 100 Total Return Index, highlighting the effectiveness of active management during that period.

2. Tactical Allocation to Mid and Small Caps

Most large-cap funds focus mainly on large-cap stocks. However, the majority of funds also have some flexibility to allocate a small portion of their assets to mid-cap and small-cap stocks.

This strategic allocation can enhance returns, especially when mid and small-cap segments outperform large-cap stocks.

In 2024, active large-cap funds that increased their exposure to mid and small-cap stocks benefited from the solid performance of these segments, contributing to their overall outperformance.

3. Defensive Characteristics During Market Volatility

​Large-cap funds’ defensive characteristics can help them weather market volatility better than broader indices.

By focusing on established companies with stable earnings, these funds may offer more consistent returns during market fluctuations.

This stability can contribute to their status among the best performing mutual funds, as they often manage to preserve capital and deliver moderate growth even in challenging market conditions.​

4. Expertise in Navigating Market Cycles

Experienced fund managers possess the expertise to navigate various market cycles, adjusting portfolios to capitalize on prevailing market conditions.

Their ability to make informed investment decisions can lead to better performance relative to market indices, which are static and do not adjust to changing market dynamics.

This expertise enables active funds to identify opportunities and manage risks effectively, potentially leading to outperformance.

5. Potential for Strategic Sector Allocations

Active large-cap funds have the discretion to overweight or underweight specific sectors based on market outlook and economic conditions.

This flexibility allows fund managers to position portfolios advantageously, potentially leading to returns that exceed those of market indices, which are weighted according to fixed sector compositions.

For instance, during periods when certain sectors outperform, funds with higher allocations to those sectors can achieve superior returns. ​

Read More: What Makes Certain Mutual Funds Ideal for Women?

Conclusion

​Large-cap funds, by focusing on established companies with stable earnings, offer investors potential for consistent returns. Through active management, strategic stock selection, and optimal sector allocation, these funds can outperform market indices. However, investors should remain mindful of challenges like market volatility and the risk of overdiversification. Aligning investment choices with individual financial goals and risk tolerance is essential.​