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Do mutual funds beat benchmark indices in terms of returns?

By Finserv MARKETS - Aug 1,2019
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Do mutual funds beat benchmark indices in terms of returns

Assets can be managed actively or passively. Mutual funds are gaining prominence in India as more and more people are preferring to invest in financial assets, moving away from traditional investment avenues such as gold and real estate. Index investing, on the other hand, is popular in developed markets like the US and it is yet to gain popularity in the Indian market. One of the major reasons for ‘active investing’ becoming popular in India is that fund managers are able to ‘beat the market’ and generate more returns than the fund’s underlying index, which is measured by alpha.

There are primarily two reasons behind this win-win situation:

(a) Compared to the overall market, the mutual fund market in India is relatively smaller and advisors often end up performing better than retail investors.

(b) Fund managers have the freedom to purchase some percentage of stock beyond a benchmark index.

But 2018 has been a remarkable year wherein the large-cap category, passively-managed index schemes outperformed the actively-managed schemes. Advancing by 12 per cent, active funds have failed to beat Nifty.

Equity MF category 1-year returns (%)
Large-cap 8.92
Large & Mid-cap 0.15
Multi-cap 2.81
Mid-cap -5.5
Small cap -11.93
Value-oriented -1.46
Nifty 12

Till now due to market inefficiency, the fund advisers were able to generate high alpha. In developed markets, for example, in the US, the fund managers are not able to so as there are constraints due to market competency. With SEBI’s re categorization and the market becoming more efficient, the chances of a fund manager to outperform becomes less. Under SEBI’s regulations, a large-cap mutual fund will have to invest 80 per cent of its money in the top 100 stocks. In addition, large-cap funds have a higher expense ratio as compared to index funds. Are investors likely to invest in index funds now?

It becomes absolutely essential for you, as an investor, to select funds carefully, ensure that your funds are able to cross the benchmark and generate returns. Your focused strategy as well as your nature to adapt to the changing environment will also play a key role here. In case you have long term financial goals and if you have a medium-risk appetite, then index funds might be the right option for you. And if you are willing to take more risk, then small-cap , as well as your nature to adapt to the changing environment,and mid-cap should be considered. If you invest only in index funds, you will definitely lose out on the high returns of companies outside the index.

A careful selection of mutual fund schemes will be crucial in your planning. Say, for example, if you look at top-rated funds on Finserv MARKETS, you will identify some high performing schemes, including Kotak Tax Saver-Scheme-Growth – Direct with+13.7% return and Mirae Asset Tax Saver Fund with +13.8% return. By carefully choosing schemes based on past performance, you can definitely beat the index.

By investing in large & mid and multi-cap funds, you can moderate the risk of under performance as returns are usually higher than large-cap funds and they also have a good track record of outperforming their benchmark.

In the contemporary market, index fund returns are low, primarily because of management costs and tracking error. It has been observed that on a 3-year basis, there is an approximate tracking error of close to -1 per cent; a percentage point below the index itself.

Mutual funds, in general, have a good record of outperforming the benchmark. However, the careful selection of the fund is key. Considering purchasing from Finserv MARKETS, which offers a large selection of funds to choose from, giving you the flexibility to choose one that matches your risk profile and your tax-saving requirements. There are three kinds of mutual funds that you can choose from on Finserv MARKETS – Equity, Debt and Hybrid.

Equity funds invest at least 65% of their funds into equity markets. They are suitable for investors with a relatively higher risk profile. Debt funds invest in instruments such as government securities, corporate bonds and debentures, fixed-income securities and others. Hybrid funds invest in a combination of debt and equity.

Investing via Finserv MARKETS gives you the benefit of complete transparency, zero commissions and detailed portfolio insights, giving you the ability to control your portfolio from the comfort of your home.

Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere.

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