Half of all large-cap funds underperform index on one-year returns

Underperformance of active funds could further spur growth in ETFs

One out of every two Indian equity large-cap funds underperformed the S&P BSE 100 in the one-year period ending December 2021, according to the S&P Indices Versus Active Funds (SPIVA) India Scorecard. The S&P BSE 100 gained 26 per cent last year.

In the same period, 50 per cent of Indian Equity mid-/small-cap, and 27 per cent of Indian ELSS funds underperformed their respective benchmarks. In the debt category, 79 per cent of Indian Government Bond and 62 per cent of Indian Composite Bond funds lagged the benchmarks respectively.

For the six months ending December 2021, 54 per cent of large cap funds underperformed the benchmarks, while 39 per cent of active ELSS and 37 per cent of the active mid- and small-cap funds underperformed their respective benchmark.

The underperformance for large-cap funds grows more acute over longer time horizons. Over a three-year period, 70 per cent of such funds underperformed the benchmark, while 82 per cent of such funds did so over a five-year period. The funds did slightly better over a 10-year period, with 68 per cent of the funds lagging the benchmarks.

Active funds in the ELSS and mid-/small-cap categories fared better in terms of returns vis-à-vis their benchmarks. The report notes that 63 per cent of ELSS funds and 46 per cent of mid and small cap funds underperformed their respective benchmarks over a 3-year period. This figure rose to 79 per cent and 58 per cent, respectively, over a five-year period. Even over a 10-year period, nearly three-fifths of such funds lagged the benchmarks.

For debt funds, the report noted that over longer periods, the majority of active funds in the bond category have underperformed their respective benchmarks. For instance, 76 per cent of Indian Government Bond and 88 per cent of Indian Composite Bond funds lagged their benchmarks over a five-year period.

Illustration: Binay Sinha

“Over the one-year period ending December 2021, mid-/small-cap was the best performing fund category among the equities covered in the SPIVA India Scorecard. The benchmark for this category, the S&P BSE 400 MidSmallCap Index, was up 51 per cent the same period. Market participants in this category of active funds may have witnessed a wider spread in fund returns as the difference in the first and third quartile fund was 19 per cent thus presenting fund selection challenges,” said Akash Jain, Associate Director, Global Research & Design, S&P Dow Jones Indices.

The underperformance of active funds, particularly large cap funds, has long been a worry for the mutual fund industry.

Last year, a report on passive investing by Finity, a low-cost investment platform, estimated that passive assets will cross Rs 25 trillion of AUM by 2025 from an AUM of Rs 3 trillion in March 2021, which is a growth of more than 8 times. In addition, it also estimates that passive assets will grow to make up 37 per cent of the overall assets in the mutual fund industry by 2025 from the 10 per cent as of March 2021. The report cites underperformance of active funds and high costs as the primary reasons for investors to switch to passive funds.