Passive investing in mutual fund schemes is not popular in India. Investors have preferred schemes managed by fund managers because of their ability to beat returns of the underlying benchmarks and generate the so-called "alpha".
However, the latest SPIVA India (S&P Indices Versus Active Funds) scorecard reveals that over a one-year period ended December 2016, about 66 per cent of large-cap equity funds, 64 per cent of ELSS funds and 71 per cent of mid & small-cap equity funds underperformed their respective benchmark indices.
The underperformance reduced over longer timeframes. In the five-year period, for instance, the 54 per cent, 25 per cent and 42 per cent of large cap, ELSS and mid & small-cap schemes underperformed their respective benchmark indices. In the 10-year period, the comparable figures are somewhat higher at 55 per cent, 50 per cent and 46 per cent, respectively.
This shows that while the majority of mid & small-cap schemes were able to beat their benchmarks, most large cap schemes had underperformed their benchmarks.
Further, there is a wide divergence between best performing funds and the laggards over a 10-year period. The report -- brought out by Asia Index, a joint venture between BSE and S&P Dow Jones Indices --- notes that first quartile funds outperformed the third quartile ones by 3.55 per cent, 3.56 per cent and 4.33 per cent in the large-cap, ELSS and mid- and small-cap categories respectively.
The SPIVA scorecard also shows that the majority of the Composite Bond funds underperformed S&P BSE India Bond Index over one-, three-, five-, and 10- year period, whereas the majority of government bond funds underperformed S&P BSE India Government Bond Index over three-, five- and 10-year period.
SPIVA India has also analysed funds based on their style consistency this year. This parameter aims to capture the percentage of funds that have diverged from their initial investment categorisation. Globally, style classification is an important metric that guide investors in their asset allocation decisions.
"Studies reveal that over the one-, three-, and five-year periods ending December 2016, only Indian ELSS funds maintained 100 per cent style consistency. Over the 10-year period, only 30.6 per cent of large-cap funds and 28.6 per cent of mid & small-cap funds preserved their style," said Akash Jain, associate director, Global Research & Design, Asia Index.