This will change the way you invest: S&P Index Versus Active Funds report

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Avinash Luthria explains why the most important report about mutual fund investing in India was published in April 2010 – the S&P Index Versus Active Funds India report – and how there is sufficient and repeated evidence avoid active mutual funds and change the way we invest. I respect Avinash’s approach to investing especially his realistic views on risk and reward.

Avinash Luthria is Founder, Fee-Only Financial Planner & SEBI registered Investment Adviser (RIA) at Fiduciaries. He was previously a Private Equity  & Venture Capital investor for 12 years and has a flagship-course MBA in Finance from IIM Bangalore. His articles have appeared at Business Standard, Mint and The Ken. See: publications  You can read his previous guest articles here:

Indian mutual funds, as a whole, do not beat the index

Acknowledgment: I would like to thank the author of the SPIVA India report, Akash Jain (Associate Director, Global Research & Design, S&P Dow Jones Indices), for several discussions that we had about the report.

Views expressed here are of the author and do not necessarily reflect the views of FreeFinCal nor S&P Dow Jones Indices

Probably the most important report about mutual fund investing in India was published in April 2010. That was the first S&P Index Versus Active Funds (SPIVA) report for India and it said that Indian mutual funds, as a whole, do not beat the index. That first SPIVA report covered the five years from year-end 2004 till year-end 2009 and it said that 71% of Large Cap Active Equity Mutual Funds failed to beat the relevant stock market index. Updated versions of the SPIVA report for India have been published since then (currently, every six months) and, in substance, they keep saying the same thing. But very few investors have read the SPIVA report and most people who read it, find it difficult to understand the SPIVA report. This is unfortunate because reading this report could completely change the way you invest. This article aims to simplify the SPIVA report to help you understand it.

Reading the S&P Index Versus Active Funds India report will change the way you invest

To make this article relatively simple, I will not be statistically precise. For example, statistically precise reading of the SPIVA report is ‘there is no proof that Large-Cap Active Equity funds, as a whole, beat the index’. The layman version of the same statement is ‘Large-Cap Active Equity funds, as a whole, do not beat the index’. I will stick to the layman version in all such points. Again, to make this article relatively simple, in most topics, I will skip over the reasons (since the reasons are often more technical).

Step 1 – The layman version: Open the latest SPIVA report for India which is for year-end 2018. To get to the signal in the data and minimize the noise and randomness in the data (a) focus on the longest period of data that is available, which is 10-year performance data and (b) focus on Large-Cap Equity (Active) funds. The SPIVA report refers to ‘Tables’ as ‘Reports’, so let’s use their terms.

Report 1 on page 4 called ‘Percentage of Funds Outperformed by the Index’ mentions that 64.23% of ‘Indian Equity Large-Cap’ (Active) funds underperformed the S&P BSE 100 index over the last 10 years. So, 64.23% (i.e. almost two-thirds) of ‘Indian Equity Large-Cap’ (Active) funds failed to do what they are supposed to do.

Step 2 – Simple Average: The 10-year data for this report starts from year-end 2008 which was close to the bottom of the equity market, so take the high returns that are mentioned here with a pinch of salt. Report 3 on page 5 Called ‘Average Fund Performance (Equal Weighted)’ mentions that ‘Indian Equity Large-Cap’ (Active) funds had a 10-year return of 15.08% per annum (p.a.) while the S&P BSE 100 index had a 10-year return of 16.08% p.a.

Step 3 – Weighted Average: Report 4 on page 5 called ‘Average Fund Performance (Asset Weighted)’ mentions that ‘Indian Equity Large-Cap’ (Active) funds had a 10-year return of 15.80% p.a. while the S&P BSE 100 index had a 10-year return of 16.08% p.a. According to this latest report, the average ‘Indian Equity Large-Cap’ (Active) fund’s returns were marginally lower than the index but for all practical purposes, the two are almost equal. This is the most important finding that you should focus on. The SPIVA report is released every six months, and it always has almost the same result. In this case, the ‘Asset Weighted’ returns happen to be marginally higher than ‘Equal Weighted’ returns because, among Large-Cap Equity (Active) funds, the larger funds happened to have marginally higher returns than the smaller funds.

Step 4 – Don’t get distracted by the noise in the data: Many people read the SPIVA report and jump to the conclusion that they should invest in mid-cap and small-cap mutual funds in the hope that they will marginally outperform the relevant index. That is an incorrect conclusion, and it only appears that way because there is more noise in the data of mid-cap and small-cap funds. We won’t go into the technical details about this. But to give you a sense that this is complex, while the active mid & small-cap funds marginally outperformed the BSE mid & small-cap index, they marginally underperformed the comparable NSE mid & small-cap index. Possibly, if the SPIVA report for India had covered 15 years of data (like the SPIVA does in the US), that might have helped to reduce the noise/randomness in the data.

Step 5 – Survivorship Bias is the trick: You might have come across less rigorous articles or casual comments that state that the average equity mutual fund beats the index. The biggest reason for this difference is visible in Report 2 on page 4 called ‘Survivorship and Style Consistency of Indian Equity Funds’. It mentions that of the 123 Large-Cap Equity (Active) funds that existed at year-end 2008, only 66.67% of funds (i.e. 82 funds) survived as independent funds by the year-end 2018. (A technical note that you can skip: Further, of the 123 large-cap funds at the start of the 10-year period, only 14.63% of funds, i.e. 18 funds, ended the 10-year period as large-cap funds i.e. some funds might have started as large-cap funds but later became ‘large-cap & mid-cap’ funds).

So, 33.33% of the 123 funds (i.e. 41 funds) ceased to exist as independent funds by year-end 2018. Funds that cease to exist are usually the worst performing funds and they are often merged into better performing larger funds. When this happens, we no longer notice the performance data of these 41 funds on various databases and on the mutual fund company website. This is called ‘Survivorship Bias’ in the data. The SPIVA report corrects for Survivorship Bias i.e. it looks at the performance of all 123 funds (at least till they existed as independent funds). Less rigorous articles do not do this, and they only analyze the performance of large-cap funds that exist today, and they ignore those 41 funds that ceased to exist. Such less rigorous articles automatically ignore the worst performing funds and hence report a higher ten-year performance for the average active mutual fund.

Step 6 – High Fees, Kill: One of the reasons that the average Large-Cap Equity Active fund does not beat the index is fees. Before factoring in fees, the average Large-Cap Equity Active fund beats the index by a small amount. But after you factor in ongoing fees (to cover, commissions, marketing expenses and salaries of the mutual fund asset management company etc), the average Large-Cap Equity Active fund does not beat the index.

Step 7 – You may do worse than average: I won’t explain the calculation/logic but Report 5 on page 6 called ‘Quartile Breakpoints of Fund Performance’ allows you to visualize that 4 friends (W, X, Y & Z) invested in Large-Cap Equity Active funds. W happened to be very lucky and did better than the index by 2.38% p.a. i.e. cumulatively over 10 years, his investment was worth 20% more than the index. X happened to be slightly lucky and did better than the index by 1.07% p.a. i.e. cumulatively over 10 years, his investment was worth 7% more than the index. Y got slightly unlucky and did slightly worse than the index by 1.02% p.a. i.e. cumulatively over 10 years, his investment was worth 11% less than the index. Z got very unlucky and did worse than the index by 2.43% p.a. i.e. cumulatively over 10 years, his investment was worth 21% less than the index. It is natural that people will jump to the question, ‘how can I be like W or X or at least avoid being like Y or Z’. The answer to that question is very complex, so it does not fit in this relatively simple article. The simplistic answer is, ‘it is extremely difficult to be like W or X and in trying to do so, you run the risk of being like Y or Z’.

Step 8 – The same story for the last 14 years: The mutual fund industry tries its best to avoid quantitative discussions about performance and instead tries to keep the discussion qualitative e.g. “the index is so easy to beat because… I am a very smart fund manager / the index is so silly / index funds buy the past and ignore the future etc“. If the mutual fund industry is forced to talk about data, then it will not talk about the SPIVA report and will instead misrepresent the data. This includes mutual fund Distributors and media/websites that depend on the active mutual fund industry for advertising revenue and survival (one such well-known website/database, keeps saying that 90% of Indian active equity mutual funds beat the index). If the active mutual fund industry is ever forced to confront some occasional non-robust analysis which shows under-performance, it then tries other tricks. One such trick is to cherry pick the data e.g. let’s look at 5-year data for the best performing category of mutual funds or let’s look at a long period for which there is no robust report such as for 15 years. Another such trick is to change the focus of the discussion to the short term (which is not suitable for such analysis) and then (correctly) point out that short term data is irrelevant for such analysis e.g. a recent trick is to focus on a short period of time and then argue that only a handful of very large companies have driven the performance of the index so it is a weird event that one should ignore.

So, remember that the SPIVA report has had the same message since year-end 2009. Across multiple reports, this has been for data going back to year-end 2004 i.e. for the last 14 years.

Step 9 – The emperor wears no clothes: The important lesson from this report is that it does not make sense to invest in active equity funds. An article that I wrote, last year, points to the SPIVA report and explains some reasons why this counterintuitive result is true: Avoid mistakes & minimize costs through index funds: Don’t waste energy fighting the law of no-free-lunch.

The less important lesson from this report is that you should avoid active equity mutual funds that have fees than are higher than the average active equity mutual fund.

Step 10 – Don’t try to escape the reality: The report raises several other questions, for example ‘can engaging with an RIA help me be like W or X’? The simplistic answer is that engaging with an RIA cannot help you be like W or X. This report also raises questions about the purpose for and true performance of Portfolio Management Schemes (PMS). But since that is a very complex topic, let’s not go into it in this article. There are many nuances that this article does not go into, particularly about the nature of the products in the past. For example, the NSE NIFTY 50 index funds also have fees and currently, they are 0.10% p.a. Also, the SPIVA report mentions that ‘It is important to note that active fund returns are after expenses, but they do not include loads and entry fees’ i.e. if one factored in entry fees/loads (that used to exist) or exit loads, the returns of active mutual funds may be lower than what the report indicates. Because of this and various other nuances (e.g. data from the US indicates that at some point in time in the future, Indian active equity funds, as a whole, will start underperforming the index), I have not gone into the question ‘If I invest in active equity mutual funds, through the Direct Plan, could I earn say 1% p.a. more than the index?’.


Starting from the first SPIVA India report for year-end 2009, the SPIVA report compared the performance of mutual funds with the correct indices i.e. the total return indices which includes dividends. The mutual fund industry (with the exception of Quantum Mutual Fund) continued to compare its performance to the wrong indices i.e. the price indices which exclude dividends. Around 2017, SEBI concluded that this blatant misrepresentation of data had to stop, and it planned to insist that all mutual funds compare their performance to the correct indices i.e. the total return indices. The mutual fund industry does its best to avoid comparing apples with apples and it aggressively fights ever being forced to. So, the mutual fund industry fought hard against this change. Luckily for investors, SEBI stood its ground to protect investors and insisted that from Feb 2018, all mutual funds must compare their performance against the correct indices i.e. the total return indices. (Note: SEBI did not insist on this for PMS. So almost all PMS reports to investors still compare the fund manager’s performance to the incorrect indices i.e. the price indices). SEBI fixed the most blatant misrepresentation of data since it was easier to fix it. But SEBI won’t be able to fix the other more complex misrepresentations of data. So, investors have to be vigilant about this. Reading the SPIVA report is a starting point to become more vigilant.

I am hoping that reading the SPIVA report will completely change the way that you look at the data and hence it will completely change the way that you invest. The direct change is that instead of wasting your valuable attention on selecting active mutual funds, you will instead focus your attention on more important questions such as not taking on more risk than you can handle and also, saving enough. The indirect change is that it makes us humbler in our views about investing. For example, if equity fund managers, as a whole, cannot beat the index, what reason does one have to believe that one is smart enough to time the market e.g. to conclude that the market is undervalued and hence significantly increase one’s allocation to equity (or conclude that the market is significantly overvalued and hence significantly reduce one’s allocation to equity).

But even if reading the SPIVA report does not completely change the way that you invest, by reading it, you will be among the very small number of people who have bothered to look at the correct data. And the next time an active mutual fund or PMS pitches a product, alarm bells will go off in your head. Hopefully, you will spot the trick in the data. But even if you are unable to spot the trick in the data, you will suspect that there is some trick in the data. It’s not very different from how we think of magicians. Even if we don’t know how a magician is doing his trick (e.g. making the Statue of Liberty disappear), we know that it is not a divine miracle. We know that it is just a smart trick.

Postscript: Benchmark Mutual fund was India’s only mutual fund focused on index funds. In 2010, my then colleagues and I came close to becoming private-equity majority-investors in Benchmark Mutual Fund (the three founders of Benchmark Mutual Fund would have continued to lead the company and be significant shareholders in it). This was even though regulations had not anticipated nor provided for a private equity investor being a sponsor of a mutual fund asset management company. However, eventually, Benchmark was acquired by Goldman Sachs (mutual fund) and the business was subsequently acquired by Reliance (Capital’s) Mutual Fund etc. Benchmark Mutual Fund’s schemes live on as India’s five actively traded ETFs. However, there is now no mutual fund house to advocate for index funds and the three founders of Benchmark Mutual Fund have moved out of the mutual fund industry. In 2010, there was one small mutual fund house to advocate for index funds and talk about the SPIVA report. Today there are zero mutual fund houses to advocate for index funds and hence no one talks about the SPIVA report. So, I am hopeful that a few RIAs (including myself) will partially make up for that void.

Avinash Luthria is Founder, Fee-Only Financial Planner & SEBI registered Investment Adviser (RIA) at Fiduciaries. He was previously a Private Equity & Venture Capital investor for 12 years and has a flagship-course MBA in Finance from IIM Bangalore; Views expressed here are of the author and do not necessarily reflect the views of FreeFinCal nor S&P Dow Jones Indices

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  1. Many Thanks sir for your courage to point out the reality. Making laymen understand this is even more complex. The only way out is to save as much as possible. Keep sharing such wonderful ideas & thanks again for your valuable articles

  2. A note on this situation can be useful in the article.

    In India, there are many index funds and ETFs tracking the large cap indices. There are a few ETFs that track more niche, ‘strategic and factor’ indices like Low Vol, Quality, etc There is an absence of index funds for other caps, and very strikingly there is no index fund tracking the NSE500 or BSE500. (One AMC has filed prospectuses for mid cap index funds.) For investors looking at mid cap and small cap space, active mutual funds are the only choice as of now.

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