Have fund investors really lost in the past five years?

A recent study by S&P and Crisil has come up with the disturbing finding that most equity funds have underperformed their benchmarks in the past five years. The S&P Indices Versus Active Funds (SPIVA) scorecard points out that between June 2007 and June 2012, 53.3% of large-cap funds underperformed the 50-share Nifty, while 50.5% of the diversified funds underperformed the broader S&P CNX 500 Index.

Given that the markets have not performed well over the past five years (see graphic), it puts a big question mark over the wisdom of investing in equity through mutual funds. If most of the equity funds cannot even beat their benchmark indices, aren’t small investors better off parking their funds in stocks or ETFs on their own?

However, the numbers churned out by the S&P Crisil study are deceptive because every fund has been given equal weightage. As the SPIVA report points out, it is statistically incorrect to equate a Rs 10 crore fund with a scheme managing Rs 10,000 crore. If an investor has 10% of his corpus in a fund that grows by 2% and 90% in a fund that grows by 10%, his overall return is not 6%, but 9.2%.




Besides the equal weightage analysis, the SPIVA study also looked at the performance of the funds based on their AUMs. This method, which gives a gigantic fund such as the Franklin India Bluechip (AUM Rs 4,565 crore) almost 750 times more weightage than the tiny ING Large Cap Equity (AUM Rs 6.11 crore), turns the argument upside down. On the asset-weighted scale, the average large-cap equity fund has beaten the Nifty and the average diversified fund has outperformed the S&P CNX 500 (see table). “The asset-weighted large-cap equity funds have returned 5.86% over the past five years, compared with 4.61% for their equal-weighted equivalents. This indicates that the funds with better performance over longer time frames had larger AUMs,” notes the report. This also means that the average investor in equity funds did not lose out on returns compared with those of the index.


For investors, this is a reiteration of the need to choose the right funds that have the potential to beat the benchmarks and deliver superior returns. You cannot be sure how a fund will perform in the future, but its track record is a good indicator. While you should check a fund’s rating before investing, don’t assume it will stay there forever. Review how your investments are faring every 2-3 months, and if a fund’s rating slips or its performance is unsatisfactory, it may be time to shift to a better scheme.

Savvier investors

The good news is that a growing number of investors is proactively assessing their portfolios and shifting to better performing schemes. The number of equity fund folios has come down from 3.97 crore in 2007 to 3.65 crore now, an 8% drop in the past five years. However, the closure of 32 lakh equity folios has not dented the total investment in equity schemes. This points to a consolidation of investments in well-performing schemes. Says Nimesh Shah, CEO and managing director of ICICI Prudential Mutual Fund: “There is a greater understanding among retail investors about the schemes they should invest in. Only well-performing schemes have witnessed inflows.”


The trend is clear from the huge increase in the AUM of some top performers in the past five years (see table). With performance as their selling proposition, these funds have attracted investors in droves. Five years ago, HDFC Top 200 was a middle-rung scheme with an AUM of Rs 2,049 crore. Today, it is the country’s largest equity fund with an AUM that is more than five times its earlier size. Few investors knew about UTI Dividend Yield before the 2008 crash. The best performing large-cap equity scheme has grown almost four-fold, from Rs 658 crore to Rs 3,540 crore in five years. The surge of inflow in IDFC Premier Equity was such that the fund stopped accepting fresh investments in February 2010. However, SIP and STP investments were permitted. Last year, it opened a window for investments, but quickly closed it after a ‘manageable’ corpus was garnered.