On the returns front, many a slip between benchmarks and equity SIPs

‘Invest systematically in mutual funds for the long term to ride out volatility’, is an advice often given by fund managers and advisors. But even as investors pour in over ₹7,000 crore in mutual funds through the SIP (systematic investment plan) route every month, the returns across most equity categories have been sub-optimal in recent years.

Consider this: In the large-cap, multi-cap, value-oriented and tax-saving equity categories, 8-9 of every 10 schemes have lagged their respective benchmarks over a three-year period.

Thanks to the rally in mid- and especially small-cap stocks in the earlier years, these funds have had a better run. The SIP returns have closely mirrored the fund returns. On the whole, three out of every four equity SIPs (116 out of 145 schemes) have underperformed in the last three years.

Why under-performance?

The move towards TRI-based (Total Return Index) benchmarking is one reason for this under-performance, according to experts. Says Deepak Jasani, Head Retail Research at HDFC Securities, “For almost all the major benchmarks, TRI returns are normally about around 1.5 percentage points higher than normal index returns. Globally, mutual funds are benchmarked on a TRI basis.”

Adds Roopali Prabhu, Head of Investment Products, Sanctum Wealth Management, “This is a more appropriate representation of the benchmark and the earlier overstatement of outperformance is now corrected.”

The narrow rally in 2018 and SEBI’s reclassification norms too have played a role in dragging fund performance.

Elaborating on this aspect, Ashish Shanker, Head, Investment Advisory, Motilal Oswal Private Wealth Management says, “This year, the rally has been extremely narrow and we have witnessed a large divergence among large-, mid- and small-cap returns. The SEBI reclassification norms have standardised allocations. This has reduced the wiggle room, especially for large-cap funds. The last time indices outperformed active managers was in 2007.”

Roopali of Sanctum adds, “Managers were compelled to sell stocks they would have otherwise chosen to hold in order to fit the new framework, post re-categorisation. Further, where the holding was illiquid and the markets were in a correction phase, the impact cost only served to hurt the performance further.”

Dealing with poor returns

Financial advisors generally ask investors to put in money systematically for the long term. But what can retail investors do when there is prolonged under-performance, and when must they actually start exiting investments made in the SIP mode?

Jason Monteiro AVP-Mutual Funds Research & Content, Prabhudas Lilladher says, “If the fund has performed consistently in the previous years, investors should wait for another 12-18 months for the performance to improve. If the scheme still lags the benchmark, the investor can consider switching to another scheme.”

Says Deepak of HDFC Securities, “Scheme review, irrespective of whether investment is done through the SIP route or is one-time, should be done every six months, whereas the category review can be done on an annual basis.”

Roopali of Sanctum suggests another way to measure relative performance. She says, “In case investors are unable to conduct in-depth research, the reliance should be on long-term rolling return to identify the most consistent performers. under-performance of a year or two is immaterial if the investment horizon is 10 years, unless the extent of under-performance is extremely stark.”

Nilesh Shetty, Associate Fund Manager-Equity at Quantum AMC, adds, “Investors should focus on the fund manager’s style. If the fund manager deviates from his stated style, then investors should be concerned and may want to look at exiting the fund.”

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