Active mutual funds fail to reflect index gains

Analysts said the underperformance of the schemes despite Nifty’s record levels is because the rally in the key indices has been driven by a few stocks.

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The Nifty, which has hit all-time highs for the second time in April, has advanced 12% in the last one year. But these gains are yet to reflect in many mutual funds’ net asset values (NAVs). Mutual fund categories--large-cap, large- and midcap, and multicap have not been able to beat the Nifty, while values of mid-cap and small-cap categories have eroded in the period.

Analysts said the underperformance of the schemes despite Nifty’s record levels is because the rally in the key indices has been driven by a few stocks. As much as 91% of the Nifty returns during the last one year came from six stocks – Reliance, HDFC Bank, Infosys, TCS, ICICI Bank and Axis Bank. Reliance has been the biggest gainer in the index over the last one year returning 43%, followed by Axis Bank at 40%, ICICI Bank 37%, TCS 33%, Infosys 28% and HDFC Bank 17.9%.

  • 0.08%Annualized Return for 2 year
  • >3 years Suggested Investment Horizon
  • N.ATime taken to double money
“The rally in the last one year is concentrated with a few stocks participating. Mutual funds run diversified portfolios which cannot take concentrated bets and hence have lagged behind the Nifty,” said Amol Joshi, founder, Plan Rupee, a Mumbai- based distributor.


The fall in auto stocks like Maruti, Tata Motors, Hero Motors and Eicher Motors, in which fund managers were overweight, also impacted their returns. Generally, mutual funds run diversified portfolios with holding in a individual stock not exceeding 10%. Most funds have 40-50 stocks in their portfolio. Focused funds could have even less with 25-30 stocks, while midcap funds have a higher number of stocks, as many as 70-100, in their portfolios.

Distributors said SEBI’s recategorisation of mutual funds, which came into effect in the last one year, too, has crimped fund managers. “Earlier many funds could chase performing stocks irrespective of the category they belong to. However, with recategorisation, schemes have to stick to their mandate, which reduces the chances of outperformance, ” says Gajendra Kothari, founder, Etica Wealth Advisors.

Distributors also point out that large participation in mutual funds by investors in the last three years have led to many large funds ballooning in size. “As a fund size increases, a the manager tends to become conservative, as he is continuously under watch. This reduces his ability to generate alpha,” says Gajendra Kothari.
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Fund scores
Equity MF category 1-year returns (%)
Large cap 8.92
Large & mid cap 0.15
Multi cap 2.81
Mid cap -5.55
Small cap -11.93
Value oriented -1.46
Nifty 12
Returns are for category average; Source: Value Research
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