The Hindu Business Line : Fund Talk

Some funds under-perform their benchmarks and yet deliver good returns. Take for instance, Sundaram Capex Opportunities Fund. A person who purchased units of this fund during NFO has reaped returns of above 75 per cent since then and yet I'm told that it has under-performed its respective benchmark. Should I worry about the fund's performance because it has trailed its benchmark? How should one measure a fund's performance?

Amit Rao

Mumbai

Measuring a fund's returns against its stated benchmark is a simple and effective method to evaluate performance, as identifying a peer group for every fund you own and tracking its returns may be difficult. But the decision to exit a fund should not be based solely on its trailing its benchmark, as there could be mitigating factors.

In the case of Sundaram Capex Opportunities Fund, the fund has delivered a healthy 75 per cent (absolute) return on its NAV since inception. The benchmark, the BSE Capital Goods Index, has delivered about 90 per cent. But comparing this fund's performance to its benchmark may give a misleading picture, because they aren't strictly comparable. To explain, just two stocks — L&T & BHEL — account for a 56 per cent weight in the BSE Capital Goods Index; they account for just a 16 per cent exposure in the Sundaram Capex Opportunities Fund.

Similarly, while the BSE Capital Goods Index features just 24 stocks drawn strictly from the capital goods space, the Capex Opportunities Fund holds over 60 stocks which straddle construction, infrastructure and many other related themes. Therefore, in this case, the Capex Opportunities fund offers investors a much more diversified and probably lower risk exposure to the capex theme than the BSE Capital Goods Index.

While the fund's more diversified profile may have worked against it (relative to its benchmark) in the past one year, the decision to avoid concentrated exposures is a prudent one for long-term investors in the fund. Therefore, in our view, there is no cause for concern about the fund's performance and we would recommend staying invested.

Coming to your query on measuring fund performance, do bear the following factors in mind when evaluating a fund's performance relative to its benchmark:

Relevance of the benchmark: Though fund houses are the best judges of the benchmark that is most appropriate for their products, the choice of a benchmark in a few cases may be dictated by the lack of an appropriate index.

Sector funds and theme funds usually benchmark themselves against the sector index that is closest in definition to their investment objectives, but there may still be substantial differences between the fund's portfolio and that of the benchmark. Out-performance or underperformance of a benchmark in the case of a sector /theme fund therefore, needs to be taken less seriously than in the case of a diversified equity fund.

Time-frame: Take your decisions on the basis of consistent under/out-performance of the benchmark for periods of over a year. Over short time frames such as a quarter or two, fund performance as well as that of the benchmark could be influenced by a concentrated run-up/decline in a few stocks or one or two sectors. A fund's failure to track the benchmark should only be a concern if it consistently misses out on performing stocks or builds positions in ones that fail.

Your own goals: A decision to retain or exit a fund also depends to a large extent on your own return expectations and the place that the fund has in your portfolio. As a long term investor, a fund that generates a steady but reasonable absolute returns may remain a good portfolio choice for you, even if it trails its benchmark by a couple of percentage points.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Aarati Krishnan

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