The Hindu Business Line : Equity schemes — Trailing broader benchmarks

Equity investments never cease to surprise investors. If you are an equity investor who believes that the ups and downs witnessed in equity investments will even out over a longer period you may be surprised to know this was not the case for equity fund investors in the past three years.

Business Line analysed the performance of 172 diversified equity schemes with a one-year track record and 138 schemes with a three-year track record to assess their performance against respective benchmarks.

Eighty-four of the 172 schemes under-performed their benchmarks over a one-year period. But the results were less encouraging over a three-year period. One out of two funds trailed its benchmark, casting doubt on the general belief that equity as an asset class holds potential to outperform over a longer period.

Equity mutual fund investors assess their investment mostly by returns. For any equity fund manager the mandate is to at least generate positive risk-adjusted returns in excess of the benchmark.

Historically, it has not been easy for a fund manager to beat a broader market index such as the S&P CNX 500 while it was less of a challenge to beat the BSE Sensex and S&P CNX Nifty. Over a three-year period, for instance, only six of the 20 schemes underperformed BSE Sensex. But for funds benchmarked against a slightly broader index, such as the BSE 200, the number was very high — with 14 out of the 24 funds trailing the benchmark.

Across diversified schemes over a three-year period, IDFC Premier Equity Fund was the top performer in its category, clocked an annualised return of 28 per cent and outpaced its benchmark BSE-500 by 17.5 percentage points. The worst performer over a three-year category was JM HIFI as it declined 16.5 per cent and trailed its benchmark Nifty by 28 percentage points.

One-year period

Only 7 of the 21 schemes that have been benchmarked against the Sensex underperformed the index over a one-year period. But for funds benchmarked against an index such as the BSE-200 the number was very high, as 22 out of 34 funds trailed their benchmark.

Over a one-year period, ICICI Pru Discovery was the star performer, generating a return of 120 per cent and outpacing its benchmark Nifty by 56 percentage points.

But over a three-year period it bettered its benchmark by only one percentage point. A point worth noting is that this fund does not entirely hold a large-cap portfolio; to this extent the Nifty may not be the most appropriate benchmark.

This analysis emphasises the need to monitor mutual fund schemes to ensure that they fulfil their objective of consistently outperforming their respective benchmarks.

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