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Half of the equity funds underperformed benchmarks in 5 yrs, says report

BS Reporter / Mumbai 07 Sep 12 | 12:55 AM

Mutual fund industry executives’ mantra to investors to remain invested for a long term—at least three years—to have sizeable returns seems to have failed miserably.

The capital markets regulator, Securities and Exchange Board of India, had raised concerns over consistent underperformance of mutual fund schemes against their respective benchmarks earlier this year. And now, a report released by S&P Dow Jones Indices in partership with Crisil under S&P Indices Versus Active Funds (SPIVA) has only strengthened the regulator’s concerns.

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According to the report, in the five-years period ended June 30, 53.33 per cent of the large cap equity funds failed to beat their leading benchmark index, S&P CNX Nifty. If the last three years are taken into consideration, 57.14 per cent funds underperformed, while in the last one year, 52.63 per cent could not beat the benchmark.

The underperformance of actively managed funds in comparison to the benchmarks over the latest five-year period demonstrates once again the difficulty for fund managers to consistently outperform the benchmark," said Simon Karaban, director at S&P Indices.

“The SPIVA report indicates that Indian equity funds continue to record losses during the year with the asset-weighted large cap funds being down by close to five per cent while their equal-weighted equivalents being down six per cent," he added.

But there is some good news, too, when it comes to diversified funds. Over 53 per cent of diversified funds outperformed the benchmark S&P CNX 500 in the one-year period ending June 30. Further, this number increased to 61.6 per cent in the three-year period. But when a longer period of five years is taken into accounting, the number again dropped below half to 49.5 per cent.

A similar trend is noted for the equity savings-linked scheme (ELSS), where the percentage of funds outperforming the benchmark in both the one-year and three-year period is stable at about 70 per cent, but drops significantly to 44.83 per cent in the five-year period, said the report.

“The mutual fund industry in India over the past few months has been undergoing multiple changes given various regulatory announcements and the rather flat capital markets. Given the environment, the number of new launches has been low and the mutual funds have been in a consolidation phase, “said Jiju Vidyadharan, director, funds and fixed income research, Crisil Research.

Percentage of funds outperformed by the benchmark
Fund category Benchmark index 1-year 3-year 5-year
Large Cap S&P CNX NIFTY 52.63 57.14 53.33
Diversified S&P CNX 500 EQUITY INDEX 46.90 38.40 50.52
ELSS S&P CNX 500 EQUITY INDEX 30.56 28.57 55.17
Balanced CRISIL Balanced Fund Index 58.62 45.16 65.63
MIP CRISIL MIP Blended Fund Index 50.88 36.17 45.65
Gilt CRISIL Gilt Index 61.76 63.64 46.88
Debt CRISIL Composite Bond Fund Index 32.14 38.30 46.51
Source: S&P Dow Jones Indices and CRISIL                                                                                Data as of: End of June 2012

“Of the different fund categories, the survivorship has been the lowest when it comes to diversified equity funds across categories and time. Whereas balanced funds, hybrid funds, gilt funds and debt funds had a 100 per cent survivorship in the one year period," he added.

Active managers of equity-oriented hybrid funds have also fallen behind benchmarks over both one-and five- year time frames. In contrast, the majority of active managers of debt oriented hybrid funds or monthly income plans (MIPs) outperformed the benchmark CRISIL MIP Blended Fund Index over the three- and five-year time frames. In the one-year period ended June 30, the majority of gilt and balanced funds underperformed, while the majority of debt, ELSS and diversified funds beat their benchmarks.

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