Last Updated on March 16, 2020 at 1:18 pm
Even a person with a casual interest in mutual funds would agree that interest in index funds and ETFs have increased over the last few years. We have shown several times before that only half or less than half of active funds in any category manage to consistently beat a representative category index. In this article, we answer if active funds have not been able to beat the market only recently or has it been the case earlier too.
In our most recent active vs passive investing study, we focussed on downside protection and return outperformance from April 2006 to March 2020: Do active mutual funds offer downside protection? Or is it a myth?.
In this article, we shall repeat this study from April 2006 to April 2017. Readers may recall, the Sensex and Nifty refused to fall along with Midcap and Smallcap market cap segments after Budget 2018 (Feb).
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The most popular indices in India were held up only by a few stocks and this disparity was so much that the return difference of Nifty 50 vs Nifty 50 Equal-weight index was at an all-time high in Dec 2019! This has now started to correct in this market fall: Why this market crash could be healthy after all!
Thus we restrict our study to April 2017 to ensure this market inhomogeneity is avoided. Large cap funds and some value funds found it hard to beat the Nifty/Sensex from 2018 onwards. The SEBI recategorization rules also kicked in mid-2018. The goal is to find out how active funds managed to perform before these developments.
Another major event that triggered an interest in index funds was the emergence of Nifty Next 50 as a hard-to-beat-index as first reported by us in May 2017. Investors flocked to it see its five-star rating and usual pulled out in fear see its performance from Feb 2018 and three-star rating. As usual, in too-late and out-too early: Are Indian Investors ready to choose Index mutual funds or ETFs?
Details of the study
We take 258 active mutual funds (regular plans for longer history) from these categories. The benchmarks used are also shown. As argued already, an aggressive hybrid fund is expected to fall lower than a broad market index, hence the use of Nifty 100. Nifty large and midcap 250 is a tougher benchmark than Nifty 200 or Nifty 500. Nifty Midcap 150 is a tougher benchmark than Nifty Smallcap 250. See: Why your small cap mutual fund must beat this benchmark!
Category | Benchmark |
Aggressive Hybrid Fund | Nifty 100 TRI |
Equity Linked Savings Scheme | Nifty 100 TRI |
Focused Fund | Nifty 100 TRI |
Large Cap Fund | Nifty 100 TRI |
Value Fund | Nifty 100 TRI |
Large & Mid Cap | Nifty Largemidcap 250 TRI |
Multi-Cap Fund | Nifty Largemidcap 250 TRI |
Mid Cap Fund | NiftyMidcap150TRI |
Small cap Fund | NiftyMidcap150TRI |
We shall define a, return outperformance consistency = no of times fund beat index/tot no returns. For example, say we have 100 13-year return data points and a fund got a return higher than the index in 65 of those instances. Then return outperformance consistency = 65/100 = 65%.
Duration: Ten years
Period: April 2006 to April 2017: Out of 80 funds, 44 funds (55%) beat the index 70% or more out of all 10Y rolling return observations (min 200).
Period: April 2006 to Mar 2020: Out of 83 funds, only 37 (44%) have a return outperformance consistency of >= 70%.
Duration: Seven years
Period: April 2006 to April 2017: Out of 100 funds, 55 funds (55%) beat the index 70% or more out of all 10Y rolling return observations (min 200).
Period: April 2006 to Mar 2020: Out of 87 funds, only 36 (41%) have a return outperformance consistency of >= 70%.
Duration: Five years
Period: April 2006 to April 2017: Out of 100 funds, 48 funds (48%) beat the index 70% or more out of all 10Y rolling return observations (min 200).
Period: April 2006 to Mar 2020: Out of 143 funds, only 62 (43%) have a return outperformance consistency of >= 70%
Duration: Three years
Period: April 2006 to April 2017: Out of 130 funds, 61 funds (47%) beat the index 70% or more out of all 10Y rolling return observations (min 200).
Period: April 2006 to Mar 2020: Out of 145 funds, only 34 (24%) have a return outperformance consistency of >= 70% (this could change once the disparity in Nifty stocks reduces).
In conclusion, clearly there is only a marginal decrease in the active funds that beat the market consistently. It was a little bit more than a coin toss (50%) up to April 2017 and little less than a coin toss-up to March 2020. It is incorrect to assume active fund managers in India are struggling only now. This is yet another compelling reason to consider index investing in India.
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