Fund construction up close
In this chapter: How a typical large-cap or flexi-cap fund is built · Concentration limits, sector caps, single-stock caps
A mutual fund is built bottom-up by the manager: identifying ideas, sizing positions, balancing concentration vs diversification, and respecting SEBI category constraints. Large-cap funds invest 80%+ in the top 100 stocks by market cap. Flexi-cap has no cap restriction. Each scheme has hard limits on single-stock and sector exposures.
A typical large-cap portfolio: 40-60 stocks, top-10 contributing 35-50% of AUM, sector weights generally within 30% (financials being the natural concentration in India). Position-sizing is conviction-based: highest-conviction picks get 4-7%; lower-conviction at 1-2%. Cash levels typically 3-7%, used opportunistically. Turnover varies: 25-50% per year for fundamental managers; higher for momentum/quant. Smaller funds are nimbler; large funds (₹50,000+ crore) face capacity constraints — they can only invest in liquid large-caps.
A practitioner insight: "tracking-error budgets". Active large-cap managers typically run 3-5% annual tracking error vs benchmark. Going below 2% is essentially closet indexing — pay active fees for index returns. Going above 7% is concentrated/contrarian — outsized return potential but risk of underperformance. Distributors and analysts should ask managers their target tracking error and judge fee fairness against it.