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The majority of actively managed equity schemes for 1-year, 3-year and 5-year periods ending June 2012, have underperformed their benchmarks over the last five years, says a study. But does it make sense to do a fixed period analysis of a product that is not fixed income in nature? Here are three reasons why the study is flawed
S&P Indices Versus Active Funds (SPIVA) scorecard, produced by S&P Dow Jones Indices in partnership with CRISIL, highlights that the majority of actively managed Indian equity mutual funds have underperformed their respective benchmark indices over the last five years’ period ending June 2012. According to the research report, majority of large-cap equity schemes failed to beat the S&P CNX Nifty benchmark index for large-cap companies, 53.33% underperformed their benchmark over the last five years, 57.14% over the last three years and 52.63% over the last year.
Over 53.10% of diversified schemes outperformed the benchmark S&P CNX 500 in the one year period ending June 2012. This number increased to 61.6% in the three year period but again dropped to 49.5% in the five year period.
This has becomes headlines everywhere leading confirming to fence-sitters and believers of bank fixed deposits that equity mutual funds are best avoided.
However, this kind of analysis and conclusion carries a few fundamental flaws. Nobody has suggested that equities have to make money no matter when they are bought.
One, it is pertinent to note that the returns taken are for just a fixed period from June 2007 to June 2012. So which investor would have underperformed by buying mutual funds? Exactly those who had bought in June 2007. If their investment was made in June 2006, the results would have been different. Take June 2003 and it would have been different still. Returns vary, depending on the start and end date. This is natural because equity funds are not fixed income products. It is obvious that to come to any conclusion, one will have to take into account different periods. This is simply done by calculating what is called rolling returns.
According to our analysis over the last five rolling periods with a quarterly frequency, the average returns of 63% of the schemes were better than that of the Nifty index. The large-cap oriented equity schemes averaged a return of 7.59% compared to the Nifty which returned 6.62%. The headline should have read “A majority of schemes beat the market index”.
Two, no investor jumps into a scheme with all his money at one go. He is consistently advised to invest systematically.
Three, no investor invests in all the schemes. He is advised to invest in the better ones. There is no shortage of good schemes to choose from. In the rolling periods taken for our analysis, the top 10 schemes returned an average of 13.13%. While one can always argue that we know which of the schemes are better only with the benefit of hindsight, the fact is choosing good quality and index-beating schemes in India has been surprisingly easy compared to the US market.
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