Last Updated on December 29, 2021 at 5:56 pm
Readers may recall, a year ago (Dec 21 2019), we showed that the return difference of Nifty 50 vs Nifty 50 Equal-weight index at an all-time high. This essentially means that only the top few stocks of Nifty were holding the market up. This was apparent from late 2017 to just before the 2020 crash: Nifty moved up while other indices like Nifty Next 50, Nifty Midcap 150 and Nifty Smallcap 250 moved down. In what can only be a relief to active fund managers and their investors, this imbalance has now corrected significantly.
Even as early as May 2020, we reported that after the market crash, 80% of active large cap funds outperform Nifty, Nifty 100. This development is now on firmer ground, although the degree of outperformance is not as high as 80%. To see what we mean, consider this table of trailing returns.
| Benchmark | NIFTY 50 – TRI | NIFTY 50 Equal Weight Index – TRI | NIFTY 100 – TRI | NIFTY 100 Equal Weight Index – TRI |
| 1 Year | 14.2 | 20.7 | 14.3 | 17.6 |
| 2 Years | 13.7 | 11.3 | 12.9 | 10.2 |
| 3 Years | 11.3 | 6.2 | 10.2 | 4.6 |
| 4 Years | 15.4 | 10.7 | 14.9 | 10.5 |
| 5 Years | 13.3 | 10.6 | 13.1 | 10.4 |
Notice how both the Nifty 50 and NIfty 100 equal weight indices have only managed to outperform the Nifty 50 and Nifty 100 in the last one year. In the Nifty 50 or Nifty 100, the top ten stocks would account for the bulk of the weight (50-60%) while in an equal-weight index, all stocks have an equal say.
It is only in the last year the bottom stocks of the Nifty 50 and Nifty 100 have been able to move up. This can also be seen from the one-year rolling return difference between the above four indices.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Notice the gradual increase in the (Equal-weight index return minus index return) over the last couple of year hastened by the market crash and subsequent rally (white circles). For the Nifty 50 pair, the difference was -10.5% in March 2020 and is now about +5.5%.
This means if you looked at the trailing one-year return of Nifty 50 Equal-weight in March 2020 it would have been 10.5% lower than Nifty 50. Today is it 5.5% higher!
Active Large Cap Fund Performance
Anyone who is used to studying fund returns in a portal like Value Research would tell you, a year back or two years ago, the top funds if you looked at the last one year return were Nifty or Sensex funds/ETFs. A few years before, they were typically backbenchers. Today, you will have to scroll down a bit to get to the first Nifty/Sensex index fund.
- If we consider last five years trailing returns, only 5 out of 27 active large caps did better than the Nifty 50 TRI.
- Last four years, again 5/27 outperformed.
- Last three years, just 2/28
- Last two years, it has shot back up to 11/28
- Last one year 11/29.
The correction in market imbalance is a key factor behind the resurgence in active large cap fund performance. Notice that that interest in index investing increased during a time when the active large cap fund performance was obvious. Will these index ‘fans’ stay put when more active funds become “five-star rated”? Only time will tell.
- Between Dec 2015 to Dec 2016: 25 out of 27 large caps outdid the Nifty 50 TRI
- Dec 2017 to Dec 2016: It dropped to 15 out of 27 as the imbalance set in
- Dec 2018 to Dec 2017: only one outperformed out of 28.
- Dec 2019 to Dec 2018: It shot back up to 13 out of 28.
- Dec 2019 to Dec 2020: 11 out of 29 large caps outdid the Nifty 50 TRI
What do these results mean? What should investors Do?
The removal of the market imbalance (even if its temporary) is good news not just for active large cap fund managers and their investors. It is good news for index investors too as the dependence on only a few stocks have gone done. See for example: Do index fund returns depend upon just a few stocks (Concentration risk)?
If you had switched from an active large cap fund to an index fund, stay put. Finding and staying invested in a large cap fund that would be at the Nifty or Sensex is still a coin-toss (50-50) today, and it was a coin-toss even before the market imbalance set in. See: Active mutual funds struggle to beat Nifty 50 for the last seven years! And Poor performance of active mutual funds: Is this a recent development?
There will always be phases like this with a resurgence in active funds. There will always be some funds that beat the market. The point to note is, it is impossible to find an active fund that will beat the index all the time and after you start investing in it.
This should be your only reason to choose the index: It is expensive to chase after returns; You can invest peacefully with an index fund without worrying about underperformance and high fees. If you have a sense of missing out when you see a handful of active funds outperform the market, then index funds are not for you. Active funds are also not for you.
Some index investors tend to get angry or confused when they see data such as this. This often stems from a lack of a plan and conviction. Just as it is incorrect of AMCs to market the efficacy of active funds blindly; it is equally incorrect to blindly market the ability of index funds to beat active funds.
That active large cap funds have been able to fare better in 2020 is a fact. Whether that is relevant to a person’s portfolio or not will depend on their perspective and strategy – assuming they have one.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)