Most large-cap and diversified equity mutual funds have underperformed the benchmark indices across the one-year, three-year and five-year periods, says a report from S&P CRISIL SPIVA.
The two fund categories underperformed their indices — the S&P CNX Nifty and the S&P CNX 500 respectively — across the one-year, three-year and five-year periods. The latest edition of the report is for the period ended June 2011.
A higher proportion of large-cap equity funds have underperformed their benchmark than diversified equity funds. The level of outperformance is highest for the five-year time frame, said the report.
In the equity-linked saving schemes (ELSS) category, 57 per cent of the funds underperformed the benchmark over the three-year period while 65 per cent of the funds underperformed the S&P CNX 500 over the five-year period. However, 62 per cent of these funds outperformed their benchmark in the last one-year period.
Equity-linked saving scheme funds are intended for tax-saving and generally have a three-year lock-in period.
“Asset-weighted returns were greater than equal-weighted returns for all three categories of equity funds across all time periods, except for the ELSS category in the one-year period. This highlights the fact that funds with higher assets under management performed better than smaller peers,” said the report.
In the hybrid category of funds, the majority of the equity-oriented balanced funds underperformed their benchmark (CRISIL BalanCEX), while majority of the debt-oriented MIPs outperformed their benchmark (CRISIL MIPEX) across all time frames.
“This proves that majority of funds with a higher equity component (balanced funds) underperformed their benchmark, while most funds with a lower equity component (MIPs) outperformed theirs. While both these categories vary their equity component within a specified range, the higher volatility (risk) in the equity component of balanced funds has not generated commensurate returns for majority of these funds,” said the report.
In the hybrid fund category, asset-weighted returns were higher than equal-weighted returns across the one-year, three-year and five-year time frames for balanced funds. A similar trend existed for MIPs across the three-year and five-year time periods, indicating again that funds with higher assets under management performed better than smaller peers.
Within fixed income fund category, 41 per cent of the gilt funds underperformed their benchmark in the one-year period, while 65 per cent underperformed in the three-year period and 53 per cent in the five-year period on an asset-weighted basis. Gilt funds mainly invest in sovereign-guaranteed securities.
“The performance of such funds is largely based on duration calls taken by the fund manager, based on his or her interest rate views. A gilt fund is likely to outperform if its average maturity falls in a rising interest rate scenario,” noted the report.
Gilt funds are the only category of funds where asset-weighted returns were lower than equal-weighted returns, added the report.