Active large cap mutual funds vs Nifty SIP returns comparison

Published: January 22, 2021 at 10:41 am

We evaluate the performance of 28 active large cap mutual funds by comparing their 1,2,3,4,5,6,7,8 year SIP returns with Nifty 50 TRI. Investors would be aware of the explicit underperformance of large cap funds from early 2018, while the actual underperformance began well before that: Active mutual funds struggle to beat Nifty 50 for last seven years!

One of the reasons for the explicit underperformance was a market imbalance where only a few stocks determined the returns of the Nifty while the rest of the market was down: Return difference of Nifty 50 vs Nifty 50 Equal-weight index at an all-time high! (Dec 2019).

The March 2020 market crash and subsequent recovery had removed some of this disparity and the performance of active large cap funds improved: Active Large Cap MFs recover along with equal-weight indices. We further evaluate their SIP performance as on 20th Jan 2021 and compare this with the situation a year before.

Base Date 20th Jan 2021

This means we shall evaluate one-year SIP return from 1st Feb 2020 to  1st Jan 2021 and compute returns on 20th Jan 2021; two-year SIp returns from 1st Feb 2019 to 1st Jan 2021 and compute returns on 20th Jan 2021 and so on.

  • 1Y SIP:  2 out of 29
  • 2Y: SIP: 7 out of 29
  • 3Y: SIP: 6 out of 28
  • 4Y: SIP: 4 out of 28
  • 5Y: SIP: 5 out of 28
  • 6Y: SIP: 4 out of 28
  • 7Y: SIP: 8 out of 28
  • 8Y: SIP: 12 out of 28

Base Date 20th Jan 2020

This means we shall evaluate one-year SIP return from 1st Feb 2019 to  1st Jan 2020 and compute returns on 20th Jan 2020; two-year SIp returns from 1st Feb 2018 to 1st Jan 2020 and compute returns on 20th Jan 2020 and so on.

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No of active large cap funds with returns better than Nifty 50 TRI index 

  • 1Y SIP: 21 out of 28
  • 2Y: SIP: 12 out of 28
  • 3Y: SIP: 6 out of 28
  • 4Y: SIP: 5 out of 28
  • 5Y: SIP: 5 out of 28
  • 6Y: SIP: 12 out of 28
  • 7Y: SIP: 14 out of 28
  • 8Y: SIP: not applicable

Not much has changed from before the crash (Jan 2020) to now (Jan 2021). There is little point in finding out the names of consistent outperformers as they would keep changing too. For example, Franklin Bluechip that has underperformed for several years has outperformed over the last year.

The outperformers themselves do not have much of  a style pure history with the SEBI mandate of 80% large caps (Nifty 100) in effect only from mid-2018.

What should investors do?

This is only for those who are confused. If you are holding underperforming active large caps

Option 1: Shift to index funds: We have already discussed how one can combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios.

Option 2: Shift to hybrid funds. At the very least, the expense ratio pays for periodic rebalancing and relatively lower volatility.

What about mid cap and small caps? Can I not use active funds here because fund managers can beat the index easily here? Unfortunately, they may beat the midcap or smallcap index with better regularity, but they still struggle against the Nifty Next 50.

Some people advise a scattergun approach: buy some active funds and buy some index funds for “some averaging benefit”. This is terrible advice with unquantifiable benefits.

If you wish to shift to index funds, the time to do so is when your portfolio is small. When future investments in index funds (and future switches from active to index) can get the job done.

There will always be “some fund” that does better than the index. It is trivial to spot one based on hindsight and start investing. The trouble is the game of musical chairs begins again once you start investing.

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Pattabiraman editor freefincalDr 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 nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or 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 for promoting unbiased, commission-free investment advice.
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