Active mutual funds struggle to beat Nifty 50 for last seven years!

Published: October 17, 2020 at 11:54 am

We present the result of SIP returns comparison: Nifty 50 vs active mutual funds (large cap, large and mid cap, mid cap, small cap and multi-cap) over the last fifteen years. The dramatic drop in outperformance seems to have started seven-eight years ago and not just from Feb 2018 as earlier believed.

We had earlier shown that Nifty 50 long term SIP returns are barely 10% (before tax). This put the difficultly of active funds to beat the Nifty in tough to digest perspective. For a SIP started 15Y ago, the Nifty 50 return would be 10.14%.  There are 31 active funds with a better return and 26 funds with a lesser return. Some prominent underperformers are:  HDFC Equity Fund;  HDFC Top 100 Fund and
Franklin India Bluechip Fund.

If someone had invested 24Y ago via SIP (this simply means investment each month) then the Nifty 500 TRI would have produced 13.95% return (Nifty 50 data was not available for this period). The 24Y SIP returns of HDFC Equity, HDFC Top 100 and Franklin Bluechip would have been 19.2%, 17.2% and 17.4% respectively. The drop in performance of the funds is quite dramatic.

Yes, the Nifty has barely produced double-digit SIP returns aside from the last 1Y. This is the table. Index investors or active fund investors, it is better to assume only 10% (before tax). Even that seems to be an overestimate from the table below.

For a SIP started 14Y ago, the Nifty 50 return would be 9.9%.  There are 37 active funds with a better return and 26 funds with a lesser return. We tabulate the rest of the durations to enable better appreciation.

SIP TenureNIFTY 50 – TRI return %No of funds with more returnNo of funds with less return

Notice how the no of funds with less return than Nifty 50 increased to 50% nine years ago (at which point it became a coin toss if your fund would beat the “market” or not). At the seven-year mark, there was a dramatic increase in underperformance. There has been an improvement over the last three years with the no of outperformers going up from 13 to 40.

What do these results mean? The decrease in Nifty 50 returns (see: Ten-year Nifty SIP returns have reduced by almost 50%) and the decrease in the number of funds able to beat it is a double-whammy. At the very least these results mean that even in an emerging economy like India it is not easy to pick funds that would consistently beat the market. Has the Indian stock market rewarded its investors for the extra risk they take? Far from clear!

So what should investors do? Whether you invest in active or passive funds, do not expect returns from your mutual fund investments! Do not define your success in terms of returns. Instead, use a low return expectation as a guideline to invest for your goals. For example, if you use a 10% return (before tax) from your 60% equity allocation and 7% return (before tax) from your fixed-income investment, the initial portfolio return (before tax) expectation = (60% x 10%) + (40% x 7%) is about 8.8%. You can easily calculate the monthly investment with any standard online calculator.

So the first step is to try and invest as much as possible and as close to this amount as possible – those who find it hard should focus on improving skills, reducing their expenses and increasing their income. Time management is the key to achieve this. The amount invested should also be increased each year by as much as possible.

The next step is to plan for reducing equity allocation gradually (not in the last few years and some advisors “believe”) and plan this reduction right now as it would increase the investment amount.


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