Majority of active funds lag behind indices

Passive funds that track benchmarks indices are not popular in India. Investors prefer schemes managed by fund managers (called active funds), due to the fund managers perceived 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 ending December 2016, 66 per cent of large-cap equity funds, 64 per cent of ELSS (equity-linked savings scheme) funds and 71 per cent of mid & small-cap equity funds underperformed their respective benchmark indices. 

The underperformance reduced over longer time frames. Over a five-year period, for instance, 54 per cent, 25 per cent and 42 per cent of large-cap, ELSS and mid & small-cap schemes underperformed. In a 10-year period, the comparable figures are somewhat higher at 55 per cent, 50 per cent and 46 per cent, respectively. 

In sum, a majority of mid & small-cap schemes were able to beat their benchmarks but the majority of large-cap schemes had underperformed.

Further, there is wide divergence between the best performing ones 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 & small-cap categories, respectively.

The SPIVA scorecard also shows the majority of Composite Bond funds underperformed the S&P BSE India Bond Index over a one-year, three-year, five-year, and 10-year period. The majority of government bond funds underperformed the S&P BSE India Government Bond Index over a three-year, five-year and 10-year period. SPIVA India has also analysed funds based on their style consistency.  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 guides investors in their asset allocation decisions.  “Studies reveal that over the one-year, three-year 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.