82% of large-cap schemes underperform benchmarks over the last 5 years: SPIVA report

The SPIVA scorecard considers plans with the highest assets while computing their performance. If a regular plan has greater assets under management than a direct plan, then the performance of the regular plan is considered. The performance of direct plans is considered if it has higher assets under management than that of a regular plan. This means that the SPIVA report largely accounts for the performance of regular plans, which are compared with the total returns index in India.

The Story Behind Underperformance

However, mutual fund analysts and distributors point out that it is better to look at rolling returns than comparing schemes with their benchmark indices. Investors should note that not all schemes use the benchmarks used by SPIVA. Many large cap equity schemes use the Nifty 50 index as a benchmark and tax saving funds (known as ELSS) use a broad-based index such as the NSE 500.

The numbers for 2021 look better than the scorecard for 2020. The study showed 50 percent of the large cap equity funds underperformed the S&P BSE 100 index in 2021 compared with 80 percent in 2020.

The uptick in the number of schemes outperforming the benchmark across equity funds categories makes investors looking for alpha (excess returns earned on an investment above the benchmark return) in Indian stocks hopeful.

However, Tim Edwards, managing director and global head of index investment strategy at S&P Dow Jones Indices, has a different take.

“CY2021 was better than CY2020 for active fund managers,” Edwards said. “However, going by the past, outperforming the benchmark index is a tough task for active fund managers in the long term.”

Hope in active funds

As outperformance by active fund managers has gone down in the past, the number of investors that believe in passive investing is on the rise. However, followers of active investing say there is scope for a significant comeback.

“Between CY2015 and CY2020, the Indian economy saw many structural changes that led to a situation of a few stocks doing well,” said Vijai Mantri, co-founder of JRL Money. “That made it difficult for active fund managers to outperform.”

However, after 2020, there’s been a broad-based recovery in the economy and going forward, there may be more opportunities to outperform the indices, Mantri adds.

“In the second half of 2020 and the first half of 2021, the equity markets were driven based on high liquidity or easy money,” said Ravi Kumar TV, founder of Gaining Ground Investment Services. “But in the later part of 2021, the markets pivoted, based on the earnings performance.”

From here, the equity markets will be driven by fundamentals and there is ample scope for active fund managers, Kumar said.

Though the debate between active funds and passive funds will heat up, investment advisors have consistently said the choice of asset classes determines portfolio returns, not so much the choice of individual schemes. This is especially true over the long term.

It makes sense to focus on the long term and not check annual performance and chase past performers. Staggered investments in equity mutual funds through systematic investment plans can help to take advantage of volatility.

Investors could also consider schemes from MC30, Moneycontrol’s curated basket of investment-worthy mutual fund schemes.