Last Updated on December 29, 2021 at 11:49 am
Using the August 2018 Equity Mutual Fund Performance Screener published yesterday, we find out how large-cap and value-oriented mutual funds have fared against the Nifty 100 Equal Weight Index. This index has equal exposure to the top 100 stocks by free-float market capitalization. Sundaram and Principal AMC have index funds based on this. So like the Nifty Next 50 (another hard to beat index- see link below), it is practically possible to track this index (although both the funds have low AUM).
In Feb 2017, I had indicated that the NIFTY 100 Equal Weight Index is a promising Mutual Fund Benchmark. Also in April 2018, while warning that the Nifty NExt 50 is not a large-cap index, I had indicated that the Nifty 100 Equal Weight (N100EW) is a promising low-risk alternative to the Nifty next 50. Also watch: my talk on index investing: Can we get higher returns with lower risk?
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Nifty Next 50: The Benchmark Index That No Mutual Fund Would Touch?!
Are Nifty Smart Beta (strategic) Indices better than the Nifty Next 50?
Nifty 100 Equal Weight Index vs large cap and value-oriented funds
A total of 45 large-cap funds (including Sensex and Nifty Index funds) and 13 value-oriented funds were compared with N100EW. Only direct plans were considered and 1,2,3,4,5 year durations were used. With the exception of Quantum Long Term Equity (QLTE), all other funds only allow a comparison of 150 5-year periods.
Out of the 1755 5Y periods studies for QLTE, the fund has outperformed N100EW an impressive 1490 times (85%) This 85% we refer to as outperformance consistency. Out of the remaining 56 funds, only the following 22 have an outperformance consistency of greater than 75%.
| Aditya Birla Sun Life Focused Equity Fund – Growth – Direct Plan |
| Aditya Birla Sun Life Frontline Equity Fund – Growth – Direct Plan |
| Axis Focused 25 Fund – Direct Plan – Growth Option |
| ICICI Prudential Nifty Next 50 Index Fund – Direct Plan – Growth |
| IDBI Nifty Junior Index Fund Growth Direct |
| Invesco India Largecap Fund – Direct Plan – Growth |
| Reliance Large Cap Fund – Direct Plan Growth Plan – Growth Option |
| SBI BLUE CHIP FUND-DIRECT PLAN -GROWTH |
| JM Core 11 Fund (Direct) – Growth Option |
| HDFC Capital Builder Value Fund -Direct Plan – Growth Option |
| Templeton India Value Fund – Direct – Growth |
| Aditya Birla Sun Life Pure Value Fund – Growth – Direct Plan |
| ICICI Prudential Value Discovery Fund – Direct Plan – Growth |
| IDFC Sterling Value Fund-Direct Plan-Growth |
| Invesco India Contra Fund – Direct Plan – Growth |
| L&T India Value Fund-Direct Plan-Growth |
| Reliance Value Fund – Direct Plan Growth Plan |
| Tata Equity P/E Fund -Direct Plan Growth |
| ICICI Prudential Bluechip Fund – Direct Plan – Growth |
| BNP Paribas LARGE CAP Fund – Direct Plan – Growth Option |
| Quantum Long Term Equity Value Fund – Direct Plan Growth Option |
| Kotak India EQ Contra Fund – Growth – Direct |
Out of the above 22 funds, 18 also have good downside protection (>75%). That is, typically those 18 funds fall lower than the index. The remaining 35 funds have a (return) outperformance consistency wrt N100EW as listed below. About 15 are Nifty and Sensex Index funds.
| Fund | Outperformance consistency over 5Y |
| Axis Bluechip Fund – Direct Plan – Growth | 59% |
| Kotak Bluechip Fund – Growth – Direct | 24% |
| Edelweiss Large Cap Fund – Direct Plan-Growth option | 21% |
| HDFC Top 100 Fund -Direct Plan – Growth Option | 14% |
| L&T India Large Cap Fund – Direct Plan – Growth | 9% |
| UTI – Master Share-Growth Option – Direct | 2% |
| Franklin India Bluechip Fund- Direct – Growth | 0% |
| Franklin India INDEX FUND NIFTY PLAN – Direct – Growth | 0% |
| HDFC Index Fund Sensex Plan-Direct Plan | 0% |
| HDFC Index Fund-Nifty 50 Plan-Direct Plan | 0% |
| UTI – NIFTY Index Fund-Growth Option- Direct | 0% |
| Taurus Largecap Equity | 0% |
| Taurus Nifty Index Fund-Direct Plan-Growth Option | 0% |
| Aditya Birla Sun Life Index Fund – Growth – Direct Plan | 0% |
| DSP BlackRock Top 100 Equity Fund – Direct Plan – Growth | 0% |
| Essel Large Cap Equity Fund-Direct Plan-Growth Option | 0% |
| HSBC Large Cap Equity Fund – Growth Direct | 0% |
| ICICI Prudential Nifty Index Fund – Direct Plan Cumulative Option | 0% |
| IDBI NIFTY Index Fund Growth Direct | 0% |
| IDFC Large Cap Fund-Direct Plan-Growth | 0% |
| IDFC Nifty Fund-Direct Plan-Growth | 0% |
| Indiabulls Bluechip | 0% |
| Principal Nifty 100 Equal Weight Fund – Direct Plan – Growth Option | 0% (this is expected due to expenses) |
| Reliance Index Fund – Nifty Plan – Direct Plan Growth Plan – Growth Option | 0% |
| Reliance Index Fund – Sensex Plan – Direct Plan Growth Plan – Growth Option | 0% |
| SBI NIFTY INDEX FUND – DIRECT PLAN – GROWTH | 0% |
| Tata Index Fund – Nifty-Direct Plan Nifty | 0% |
| Tata Large Cap Fund -Direct Plan Growth | 0% |
| JM Large Cap Fund (Direct) – Growth Option | 0% |
| Canara Robeco Bluechip Equity Fund – Direct Plan – Growth | 0% |
| LIC MF Index Fund-Nifty Plan-Direct Plan-Growth | 0% |
| LIC MF Index Fund-Sensex Plan-Direct Plan-Growth | 0% |
| LIC MF Large Cap Fund-Direct Plan-Growth | 0% |
| UTI Value Opportunities Fund- Direct Plan – Growth Option | 0% |
| SBI CONTRA – DIRECT PLAN – GROWTH | 0% |
Excluding the index funds, only half the active funds have consistently outperformed 75% or better. So as regards the titular question, even now it seems to be a struggle for large caps to outperform the N100EW. Could well become harder in future. From June, large-cap funds can only invest 80% of their assets in the top 100 stocks. So the N100EW is a suitable index for comparison. In the past, many large caps had anywhere between 15-30% of midcaps at any given time. Even after the SEBI recategorization, it should be possible for large-cap funds to beat Sensex or Nifty (as they are market cap weighted). The challenge would be N100EW.
These six funds have got 25% more return than N100EW over the 5Y periods considered almost always!!
| Invesco India Contra Fund – Direct Plan – Growth |
| Tata Equity P/E Fund -Direct Plan Growth |
| IDFC Sterling Value Fund-Direct Plan-Growth |
| L&T India Value Fund-Direct Plan-Growth |
| Aditya Birla Sun Life Pure Value Fund – Growth – Direct Plan |
| ICICI Prudential Value Discovery Fund – Direct Plan – Growth |
It is striking that all of them are value-oriented!
Over 3-years, 600 data points were available. However, only 15 out of 57 funds consistently beat N100EW >= 75%.
Now, these 19 funds have less than 60% outperformance consistency over 1,2,3,4,5 years!!
| Indiabulls Bluechip |
| Axis Bluechip Fund – Direct Plan – Growth |
| Kotak Bluechip Fund – Growth – Direct |
| HDFC Top 100 Fund -Direct Plan – Growth Option |
| Essel Large Cap Equity Fund-Direct Plan-Growth Option |
| SBI CONTRA – DIRECT PLAN – GROWTH |
| L&T India Large Cap Fund – Direct Plan – Growth |
| Tata Large Cap Fund -Direct Plan Growth |
| Edelweiss Large Cap Fund – Direct Plan-Growth option |
| UTI – Master Share-Growth Option – Direct |
| Canara Robeco Bluechip Equity Fund – Direct Plan – Growth |
| Franklin India Bluechip Fund- Direct – Growth |
| HSBC Large Cap Equity Fund – Growth Direct |
| JM Large Cap Fund (Direct) – Growth Option |
| IDFC Large Cap Fund-Direct Plan-Growth |
| LIC MF Large Cap Fund-Direct Plan-Growth |
| UTI Value Opportunities Fund- Direct Plan – Growth Option |
| DSP BlackRock Top 100 Equity Fund – Direct Plan – Growth |
| Taurus Largecap Equity |
So what should we do?
There was a time ICICI Nifty Next 50 had a low AUM. But over the last year, it has increased significantly. I expect the same to happen to Sundaram and Principal N100EW index funds. At that point, those who have the confidence to manage risk on their own can consider a shift from large-cap funds. For now, let us watch from the sidelines.
As strategic indices become more popular, mutual fund houses can no longer claim outperformance over market cap weighted indices. I had always maintained that when the facts change I will change my stance too. I think there is more than enough evidence that we are on an extended inflexion point where index investing seems to make sense for those who can manage risk. I had already lamented that we do not have a midcap index fund (anymore!)
Yes, there are about 50% of active funds that can outperform a strategic index (return-wise). However, since we cannot know which those funds are beforehand, indexing is the simplest solution. However, lack of popular options and lack of liquidity in ETFs are still obstacles. As mentioned in this post: Here is how you can select ETFs by checking how easy it is to buy/sell them, we cannot rush progress. As our equity market grows in popularity, index investing will become a viable option We just need to sit it out.
If you cannot stomach paying fees to active large-cap funds, then switch to equity-oriented balanced funds: Using Balanced Mutual Funds As The Core Equity Portfolio Holding At least there, the fee has better justification (more on this later). Note that both N100EW index funds have only about 19-20 Cr in AUM each. Unless this improves fast, the AMC will simply shut down the fund or merger it with another. So don’t get too excited with the “I told you so about indexing” mode. Still, early days and still not hard to beat market cap weighted large cap indices. It is not enough if facts change. Practical alternatives must also become popular enough.
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