76% of equity mutual fund strategies are one of the most popular investment options in India, as they offer diversification, professional management, and liquidity to investors. However, not all mutual funds are able to deliver consistent and superior returns over the long term. In fact, according to an analysis by ETMutualFunds1, around 76% of equity mutual fund schemes have failed to beat their respective benchmarks in the seven-year horizon.
In this blog post, we will explore the reasons behind this underperformance, the categories and schemes that have outperformed or underperformed their benchmarks, and some tips on how to choose the right mutual funds for your portfolio.
What are benchmarks, and 76% of equity mutual fund strategies
A benchmark is a standard or reference point that is used to measure and compare the performance of a mutual fund scheme. A benchmark can be an index, such as Nifty 50 or Sensex, or a customized basket of securities that reflects the investment objective and strategy of the scheme.
Benchmarks are important because they help investors evaluate how well a mutual fund scheme is doing in relation to its peers and the market. A mutual fund scheme that beats its benchmark is said to have generated alpha, or excess returns, while a scheme that underperforms its benchmark is said to have generated negative alpha, or inferior returns.
OPEN YOUR ACCOUNT PAYTM,MONEY👉CLICK HERE
What factors contribute to influencing the performance of mutual funds?
The success of mutual funds is contingent upon a multitude of factors, including:
The fund manager’s skill, experience, and investment style
The fund’s portfolio composition, diversification, and risk-return profile
The fund’s expense ratio, turnover ratio, and exit load
The market conditions, trends, and cycles
The fund’s benchmark selection and suitability
Which categories and schemes have underperformed or outperformed their benchmarks?
For the study, ETMutualFunds considered equity categories such as large cap, mid cap, small cap, large and mid cap, flexi cap, focused fund, value and contra fund, and ELSS. They considered trailing returns for the analysis, which are the returns generated by a scheme over a specific period in the past. They only considered regular and growth-option schemes.
The analysis revealed that out of 157 equity mutual fund schemes that have completed seven years in the market, 119 schemes have failed to beat their respective benchmarks, while 38 schemes have managed to outperform their benchmarks in the seven-year horizon.
The mid-cap category was the worst hit, as out of 21 schemes, 20 schemes underperformed their benchmarks. The large and midcap categories witnessed 90% underperformance, as out of 20 schemes, 18 failed to beat their benchmarks. The focused fund and large cap categories had 86% and 83% of underperformance, respectively.
The ELSS and Flexi Cap categories had 78% and 79% of underperformance, respectively. The value fund category had 58% underperformance, while the small-cap fund category had 23% underperformance. The contrafund category was the only one that had 100% outperformance, as all three schemes in this category beat their benchmarks.
AXIS BANK MUTUAL FUNDS👉APPLY NOW
Some of the schemes that underperformed their benchmarks on the seven-year horizon are:
HDFC Mid-Cap Opportunities Fund, which offered 18.73% compared to 20.12% by its benchmark (Nifty Midcap 150-TRI),
Franklin India Prima Fund, which offered 14.96% compared to 20.12% by its benchmark (Nifty Midcap 150-TRI),
Navi Large & Midcap Fund, which offered 13.19% compared to 16.18% by its benchmark (S&P BSE 250 LargeMidCap Index, TRI),
HDFC Focused 30 Fund, which offered 11.64% compared to 16.18% by its benchmark (S&P BSE 250 LargeMidCap Index, TRI),
ICICI Prudential Bluechip Fund, which offered 14.02% compared to 15.29% by its benchmark (Nifty 100-TRI),
Some of the schemes that outperformed their benchmarks in the seven-year horizon are:
SBI Contra Fund, which offered 19.51% compared to 15.29% by its benchmark (Nifty 100-TRI),
Kotak India EQ Contra Fund, which offered 18.93% compared to 15.29% by its benchmark (Nifty 100-TRI),
Invesco India Contra Fund, which offered 18.63% compared to 15.29% by its benchmark (Nifty 100-TRI),
Nippon India Small Cap Fund, which offered 24.64% compared to 19.51% by its benchmark (Nifty Smallcap 250-TRI),
Quant Large & Mid Cap Fund, which offered 23.82% compared to 16.18% by its benchmark (S&P BSE 250 LargeMidCap Index – TRI)
BEST BOOK FOR MUTUAL FUNDS👉BUY NOW
Selecting the appropriate mutual funds for your investment portfolio: What’s the best approach?
Choosing the right mutual funds for your portfolio can be a challenging task, as there are thousands of schemes available in the market, each with different features, objectives, and performance. However, you can follow some tips to make the process easier and more effective. Here are some tips to help you pick the right mutual funds for your portfolio:
Define your investment goals, risk appetite, and time horizon. This will help you narrow down the categories and schemes that suit your profile and preferences.
Do your research and analysis. Compare the schemes based on various parameters, such as past performance, consistency, risk-adjusted returns, expense ratio, portfolio composition, fund manager’s track record, and benchmark suitability.
Diversify your portfolio. Invest in different categories and schemes that have a low correlation with each other so that you can reduce your overall risk and enhance your returns.
Review and rebalance your portfolio periodically. Monitor the performance of your schemes and the market conditions, and make adjustments to your portfolio as and when required to align it with your goals and risk tolerance.
BEST BOOK FOR MUTUAL FUNDS👉BUY NOW
Conclusion
Mutual funds are a great way to invest in the equity market, as they offer many benefits to investors. However, not all mutual funds are able to beat their benchmarks over the long term, and some categories and schemes have underperformed significantly over the past seven years. Therefore, investors need to be careful and diligent while choosing the right mutual funds for their portfolio and follow some tips to optimize their returns and minimize their risks.
FAQs
Q: What is the source of the data for the analysis of equity mutual fund schemes?
Ans. The data for the analysis of equity mutual fund schemes was taken from the ETMutualFunds website, which provides comprehensive information on mutual funds in India.
Q: How reliable is the trailing returns analysis for evaluating mutual fund performance?
. Trailing returns analysis is a common method for evaluating mutual fund performance, as it shows how a scheme has performed over a specific period in the past. However, it has some limitations, such as:
- It does not account for the volatility or risk of the scheme
- It does not reflect the current market conditions or future prospects of the scheme
- It may be influenced by survivorship bias, as only the schemes that have survived the period are considered
Therefore, trailing returns analysis should not be the sole criterion for choosing a mutual fund scheme, and investors should also consider other factors, such as consistency, risk-adjusted returns, expense ratio, portfolio composition, the fund manager’s track record, and benchmark suitability.
Q: Which category of equity mutual funds is best suited for my investment goals and risk profile?
Ans. A: There is no one-size-fits-all answer to this question, as different categories of equity mutual funds have different characteristics, advantages, and disadvantages. The choice of the category depends on various factors, such as:
- Your investment goals, such as capital appreciation, income generation, tax saving, etc.
- Your risk appetite, or how much risk you are willing to take for higher returns
- Your time horizon, or how long you plan to stay invested in the scheme
- Your asset allocation, or how you want to diversify your portfolio across different asset classes, such as equity, debt, gold, etc.
Generally speaking, the following guidelines can be followed for choosing the category of equity mutual funds:
- Large-cap funds are suitable for investors who want stable and moderate returns with low risk and a long-term investment horizon
- Mid-cap funds are suitable for investors who want higher returns with moderate risk and have a medium- to long-term investment horizon
- Small-cap funds are suitable for investors who want very high returns with high risk and have a very long-term investment horizon
- Large and mid-cap funds are suitable for investors who want a balance of stability and growth and have a medium- to long-term investment horizon
- Flexi-cap funds are suitable for investors who want the fund manager to have the flexibility to invest across market capitalizations, sectors, and themes and have a long-term investment horizon
- Focused funds are suitable for investors who want the fund manager to concentrate on a few high-conviction stocks and have a high risk tolerance and a long-term investment horizon
- Value and contra funds are suitable for investors who want the fund manager to invest in undervalued or out-of-favor stocks and have a contrarian approach and a long-term investment horizon
- ELSS funds are suitable for investors who want to save tax under Section 80C of the Income Tax Act and have a lock-in period of three years
Q: How can I invest in equity mutual funds online?
Ans. A: There are various ways to invest in equity mutual funds online, such as:
- Through the official website or app of the mutual fund house
- Through the online platform or app of a mutual fund distributor or advisor
- Through the online platform or app of a robo-advisor or fintech company
- Through the online platform or app of a stock broker or demat account provider
Before investing in equity mutual funds online, you should do your research and analysis, compare the schemes based on various parameters, and choose the ones that suit your profile and preferences. You should also read the scheme information document, key information memorandum, and offer document carefully and understand the terms and conditions, risks, and charges involved. You should also have a valid PAN card, bank account, and KYC (Know Your Customer) verification. You should also follow the steps and instructions given by the online platform or app and complete the transaction securely.
