More than two of every five diversified equity schemes in red in H1FY19

Around 45% of the 408 schemes, including direct plans, have given negative returns; 75 % of the schemes have underperformed the benchmarks

More than two of every five diversified equity scheme has given negative returns in the first six months of the financial year 2019. 

Around 45 per cent of the 408 schemes, including direct plans, have given negative returns, data from Value Research shows; 75 per cent of the schemes have underperformed the benchmarks. 

Small-cap schemes fared the worst with average six-month returns of -11.4 per cent, while large caps emerged the best among equity schemes with returns of 6 per cent. Market observers attribute the underperformance to large sums of money chasing too few stocks, and the impact of regulatory changes such as categorisation of schemes.
 

Benchmark indices have rallied on the back of the outperformance of a few select names, such as Tata Consultancy Services, Infosys and Reliance Industries. Within the BSE100 universe, for instance, nearly 70 per cent of the stocks lag the index returns.

The categorisation of schemes and the introduction of total return index (TSI) for benchmarking have also pulled down returns for some schemes. TRI may have shaved off 1-1.5 per cent (average annual dividend yield for Indian equities) from the returns of equity schemes. Earlier, the net asset value (NAV) of MF schemes took into account dividends for computing returns. The schemes were, however, benchmarked against simple price-return indices that did not take into account the dividend component.
 

“The sustenance of negative NAVs of equity MFs, in our view, is a risk for the broader market. Empirical evidence and industry view support our view that retail participation in equity markets is indeed cyclical and vulnerable to market vagaries,” says a recent strategy note by Emkay.

Performance of equity schemes

Active funds may still see a turnaround over the next few quarters as corporate earnings improve and more stocks start to outperform. Large-cap schemes, however, may continue to find it difficult to generate alpha, given the impact of TRI, believe experts.

“We expect a gradual recovery in GDP growth and Nifty earnings growth of 13 per cent/15 per cent in FY19/FY20. This is an improvement over FY18, but more a reversion towards pre-disruption levels. Although India's demographics are better than those of peers, the best of the growth boost from its demographic dividend is likely behind it,” said a recent research note by UBS.

Mutual funds have remained net buyers into Indian equities, with purchases for 26 straight months. Since August 2016, MFs have pumped in Rs 2.41 trillion into stocks, regulatory data shows. The quantum of flows has slowed with net investment, totalling Rs 168 billion in the July-September quarter, compared to an average around Rs 300 billion during the past five quarters.