Analysis Reveals: Over 75% of Equity Assets Lag Behind Benchmark Performance.

Over the last few years, there has been a lot of discussion about how active funds have struggled to exceed their benchmark indices. Typically, the managed money company compares performance to a benchmark. There has been an ongoing controversy between active and passive fund management. Active fund managers conduct independent research on the firms in which they invest, whereas passive fund managers invest in the index's constituents in equal proportion.

This report conducted an analysis of mutual fund performance across a lengthy and big dataset. The research analysed a five-year rolling return for the period April 1, 2014 to March 31, 2024 in order to encompass a dataset of NAVs from April 1, 2014 to March 31, 2024. So all five-year returns for each fund from April 1, 2014 to March 31, 2024 were analysed, and their average return was compared to the Nifty's average return.

The study has a wide collection of data points for daily NAVs over a ten-year period, and rolling return analysis is preferable for reaching a conclusion in terms of a performance measure on a daily basis.

The paper analysed all of the equity strategies listed on the AMFI website, but only funds that existed before March 31, 2014. The NAVs of the regular options were evaluated. The most popular index is the Nifty 50. The Nifty 50 has two indexes: the Principle Return Index (PRI), which solely analyses underlying stock price movement, and the Total Return Index (TRI), which takes into account both the stock price and the underlying dividends paid. For the purposes of this research, the Nifty 50 TRI is used because it represents the total return, and the fund's NAV includes the dividend.

The subsequent classifications were taken into account throughout the examination:

Analysis was done on the whole AUM (assets under management) of equity schemes that were in place before April 1, 2014, totaling Rs 18,52,314 cr. The Nifty TRI and the Nifty Bees, the earliest Nifty ETF in India, were used to compare the rolling return performance. For each of the aforementioned categories, the following outperformances and underperformances were noted at the AUM level.

According to the following table, the Nifty was outperformed by about 75% of the total equities AUM, which consisted of equity funds that were established before April 1, 2014. Actually, the Nifty has outperformed every large cap fund, targeted fund, value fund, dividend yield fund, and contra fund. The Nifty has outperformed all other funds, including the Flexi Cap, Large & Midcap, ELSS, diversified sector funds, and multicap funds. Over half of the mid-cap funds underperformed the Nifty, whilst small-cap funds significantly outperformed it. The outcomes were the same when we examined the performance in comparison to Nifty Bees, the original Nifty ETF.

On the basis of prior performance, the funds are marketed. As soon as the historical performance begins to appear promising, significant inflows of funds begin to negatively impact the funds' performance. The difficulty of outperforming Nifty increases with the size of the fund. It is difficult to outperform the Nifty, which is based on the free float market capitalization that results from general market wisdom. As in the developed market, one has observed a growth in the overall index/ETF AUM to over 25 percent of all equity funds. It makes sense that investors would begin to compare the performance of their assets to the index and begin investing in index funds as financial literacy increases.

When EPFO began making investments in index/ETFs, the passive fund market in India received a boost. Compared to active funds, passive funds have substantially lower operating expense ratios. This is so that passive strategies don't have to pay for fund management or research expenses because they just replicate the index.

From the following data, it is evident that it is exceedingly difficult to outperform the Nifty, as nearly 75% of all actively managed equities assets have underperformed the Nifty.

Author: Prayas Sarkar, MBA Finance

Post Graduate Programme of Financial Markets

NISM VA, NCFM Capital Market Dealer Module