Only 9 out of 87 thematic MFs have consistently outperformed Nifty 100

Last Updated on November 5, 2021 at 8:46 am

Only nine out of 87 thematic or sectoral mutual funds have consistently beaten the Nifty 100 Total Returns Index.  Nifty 100 was used because, if these funds cannot consistently beat a simple large cap index (equivalent to Nifty 50 or Sensex), it makes the entire category unsuitable for retail investors who might make the mistake of systematically investing in these expensive and volatile funds.

Note: These are not investment recommendations, and investors should not use the funds listed below as investments. We are trying to point out most thematic funds fail to beat a simple large cap index. This means picking a fund that would do so in future is impossible. Sectoral funds are generally more volatile than diversified indices or mutual funds. Such funds are suitable only for investors who can appreciate the dynamics of a particular sector or theme and can make tactical (quantitative or qualitative) entry and exit.

How the funds were selected

We consider every possible 3,4, and 5-year investment windows bet Jan 1st 2013 and Oct 6th 2021.

We shall define a return outperformance consistency = no of times fund beat index/tot no returns. For example, say we have 100 3-year return data points, and a fund returned higher than the index in 65 of those instances. Then return outperformance consistency = 65/100 = 65%.

We then define a downside protection consistency using the downside capture ratio. This measures how much of a benchmark’s monthly losses (if monthly return < 0) a fund captures. A downside of 80% means a fund has captured only 80% of the index losses. Read more: Do active mutual funds offer downside protection? Or is it a myth?

Downside protection consistency is defined as the number of investment periods for which the fund fell less than the index (suffered lower losses) divided by the total no of periods. This is computed for every possible 3,4, and 5-year window.

To qualify as a “consistent performer,” the fund should have a return outperformance consistency of 70%. We shall also look for a downside protection consistency of 70% or more over 3,4 and 5 -year periods.

The full details of the study, along with data for other mutual fund categories, can be found here: October 2021 Equity Mutual Fund Performance Screener.

The nine consistent thematic mutual funds

The following funds have a return outperformance consistency of more than 70%.

1. Mirae Asset Great Consumer Fund – Direct Plan-Growth
2. Canara Robeco Consumer Trends Fund – Direct Plan-Growth
3. Aditya Birla Sun Life India Gennext Fund – Growth – Direct Plan
4. Invesco India Financial Services Fund – Direct Plan-Growth
5. ICICI Prudential Banking and Financial Services Fund – Direct Plan-Growth
6. SBI PSU Fund – DIRECT PLAN – GROWTH
7. SBI BANKING & FINANCIAL SERVICES FUND – DIRECT PLAN-GROWTH
8. Tata Digital India Fund-Direct Plan-Growth
9. Nippon India US Equity Opportunites Fund- Direct Plan-Growth Plan- Growth Option

Out of these, only 6 have a downside protection consistency of more than 70%.

1. Mirae Asset Great Consumer Fund – Direct Plan-Growth
2. Canara Robeco Consumer Trends Fund – Direct Plan-Growth
3. Aditya Birla Sun Life India Gennext Fund – Growth – Direct Plan
4. SBI PSU Fund – DIRECT PLAN – GROWTH
5. Tata Digital India Fund-Direct Plan-Growth
6. Nippon India US Equity Opportunites Fund- Direct Plan-Growth Plan- Growth Option

In summary,  only 9 out of 87 funds have managed to outperform a large cap index consistently. While this is not the investment mandate of the funds, the large cap index serves as a benchmark for the retail investor. Choosing to invest systematically in thematic funds can be an expensive mistake similar to the situation for small cap funds: Do not use SIPs for Small Cap Mutual Funds: Try this instead!

We, therefore, recommend that investors avoid all thematic or sectoral funds unless they have a good understanding of the investment universe and can make tactical entry or exit calls.