Active large-cap funds closely mirror Nifty 50 index: New study finds 90% overlap in sectoral allocation

If you are investing in a large-cap fund, you are effectively investing in a portfolio that closely resembles the Nifty 50 index fund in terms of sector allocation.

A study by DSP Mutual Fund reveals that around 90% of the sectoral allocation of an active large-cap fund closely mirrors the Nifty 50 Index, indicating limited deviation from the benchmark at the sector level.

The study also found that portfolio overlap increases among the largest funds, with the top 10 large-cap mutual funds by assets under management (AUM) showing even higher commonality with the index.

The median active large-cap fund maintains sector allocations that are broadly in line with the Nifty 50 across most sectors. Financials, the largest sector in the index, account for 36.8% of the Nifty 50 compared with 34.5% in the median active large-cap fund.

Other sectors also show close alignment, including materials, consumer staples, utilities, industrials, and communication services.

The biggest deviation is seen in consumer discretionary, where the median active large-cap fund allocates 13.5% compared with 11.1% in the Nifty 50. On the other hand, energy has the largest underweight allocation, with active funds allocating 5.8% as compared to 9.8% in the benchmark.

Despite these differences, the study estimates that around 90% of the sectoral allocation in a median active large-cap fund is common with the Nifty 50. This means that most large-cap funds offer limited sectoral differentiation for investors who also hold a Nifty 50 index fund.

Portfolio overlap extends beyond sector allocation

The study also analysed the underlying stock portfolios of active large-cap funds and found a significant overlap with the Nifty 50.

Around 58% of large-cap funds portfolios comprise stocks that are also part of the Nifty 50, while the remaining 42% represent active bets outside the benchmark.

This indicates that although fund managers seek to generate alpha through selective stock picking, a majority of their holdings continue to mirror the Nifty 50.

Largest funds resemble the benchmark even more

The study found that the overlap with the Nifty 50 is even higher among the industry’s largest schemes.

The top 10 large-cap funds by AUM have an average portfolio overlap of 64% with the Nifty 50, leaving only 36% of the portfolio in active positions outside the index.

This suggests that as fund size increases, portfolios tend to move even closer to the benchmark, further narrowing the distinction between active large-cap funds and a Nifty 50 index fund.

Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.