A reader writes, “Sir, you have repeatedly pointed out that it is hard for most active funds to beat the index, and this applies not only to large cap funds but also to mid cap and even small cap funds (when benchmarked with a mid cap index). However, can I use a hybrid like an actively managed large and mid cap fund instead of a large cap index?”
First, let us point to the articles mentioned above:
- Is it game over for active large cap mutual funds?
- Myth Busted: Active mid cap mutual fund managers can easily beat the index.
- Why investing in small cap mutual funds does not make sense!
Next, we need to fix a suitable benchmark to determine how active large and mid cap funds have performed. These funds must hold 35% of large caps and 35% of mid cap stocks at all times. Typically the large cap holding hovers close to 50%, and there is a small exposure to mid caps as well.
We prefer the Nifty Large Midcap 250 Total Returns Index as it has an aggregate weight capping of 50% for both large caps (Nifty 100 universe) and mid caps (Nifty 150 universe). We can also use the Nifty 200 Total Returns Index bit this is purely free-float market cap weighted and so not too different from Nifty 100 or Nifty 50.
The S&P BSE 250 LargeMidCap has 250 stocks weighted only by market cap, so its performance will be close to the Nifty 200. The S&P BSE 250 LargeMidCap, 65:35 is 65% of S&P BSE 100 LargeCap and 35% of S&P BSE 150 MidCap. This is also an appropriate index for evaluating active large and mid cap funds.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
So in this article, we present performance consistency results of 22 actively managed large and mid cap funds compared with (1) Nifty 200 TRI, (2) S&P BSE 250 LargeMidCap, 65:35 and (3) Nifty Large Midcap 250 TRI.
We shall use rolling return outperformance consistency as a metric. The fund returns are compared with category benchmark returns over every 3Y, 4Y, and 5Y period. Higher the outperformance consistency, the better. Suppose 876 fund returns were compared with 876 benchmark returns, and the fund has beaten the benchmark 675 times. The consistency score will be 675/876 ~ 77%.
- There are 22 large and midcap funds with at least 500 rolling return entries over three years, 21 such funds over four years and 20 such funds over five years.
- Comparison with Nifty Large Midcap 250 TRI.
- Three years: 7 out of 22 funds have an outperformance consistency score of > 70%
- Four years: 8 out of 21 funds have an outperformance consistency score of > 70%
- Five years: 9 out of 20 funds have an outperformance consistency score of > 70%
- Comparison with Nifty 200 TRI.
- Three years: 10 out of 22 funds have an outperformance consistency score of > 70%
- Four years: 8 out of 21 funds have an outperformance consistency score of > 70%
- Five years: 11 out of 20 funds have an outperformance consistency score of > 70%
- Comparison with S&P BSE 250 LargeMidCap, 65:35 TRI.
- Three years: 9 out of 22 funds have an outperformance consistency score of > 70%
- Four years: 7 out of 21 funds have an outperformance consistency score of > 70%
- Five years: 8 out of 20 funds have an outperformance consistency score of > 70%
So less half the number of active large and mid cap funds have a consistent outpeformance record!
Investors currently holding large and mid cap funds may review their performance individually (depending on when they started investing) and then take a call. Those looking to invest fresh must appreciate that these funds, like all other actively managed funds, will go through periods of ups and down wrt the index.
We cannot bring ourselves to recommend actively managed large and mid cap funds instead of any index fund because of the poor performance record of the category. We also do not recommend passive funds in this category (e.g. Edelweiss NIFTY Large Mid Cap 250 Index Fund) as they do not have enough tracking error history. Since most stocks beyond the Nifty 50 have a large impact cost, it will be tough for a fund manager to track 250 stocks passively.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
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 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
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)