Sunday, April 23, 2017

Why Investing in Actively Managed Funds in a losing proposition

A while ago I wrote a post on Index funds which generated a lot of emails and discussion on which funds to choose and how to go about it.

Here is an analysis I performed for all the actively managed funds (as on Value Research, data as of today).  I chose all types of funds whether large/mid/small cap, including thematic/sectoral funds, balanced funds and even included tax saving funds/ELSS.  The funds were thus chosen from:
Equity: Banking, Equity: FMCG, Equity: Infrastructure, Equity: International, Equity: Large Cap, Equity: Mid Cap, Equity: Multi Cap, Equity: Others, Equity: Pharma, Equity: Small Cap, Equity: Tax Planning, Equity: Technology, Hybrid: Equity-oriented
(The only exclusions were: Plans Suspended for Sales, Direct Plans, Closed-end).

For the Nifty Index I used Reliance Nifty BEES ETF as the proxy.  Similarly for the Index Nifty Next Fifty (earlier called Nifty Junior), I used the fund Reliance ETF Junior BeES.  Both of these funds are popular Index funds and have good index correlation.  They are also more than 10 years old in order to help in the analysis.

Here is the data which I got as of today 23-Apr-2017 (raw data available here):


1 Year
3 Year
5 Year
10 Year
NIFTY NEXT 50 Returns
34.29%
23.65%
20.25%
13.60%
NIFTY Returns
16.23%
11.20%
12.65%
9.31%
Total No. of MFs
416
351
324
205
No. of MFs ourperforming Nifty Next 50 Index
52
67
54
56
No. of MFs ourperforming Nifty Index
286
276
241
155
% of MF outperforming Nifty Next 50
13%
19%
17%
27%
% of MF outperforming Nifty
69%
79%
74%
76%
Average Returns for the Period (ALL FUNDS)
21.58%
17.34%
15.73%
11.66%
Average Return for all funds outperforming NN50
39.69%
28.61%
24.27%
15.74%
Average Return for all funds under performing NN50
18.92%
14.65%
14.00%
10.10%


The data clearly shows:
  • Nifty Next 50 Index beats more than 70% of ALL types of funds over a 1,3,5 or 10 year period (see data in red).
  • Most actively managed funds are able to beat Nifty Index.  This is a food for thought for people trying to invest in Nifty based low cost index funds.  The only value I can see with these (Nifty based Index funds) is diversification. 
  • If you are trying to choose an actively managed MF, you have less than 17% chance of even beating Nifty Next 50 Index over a 5 year period.  
  • It does not matter if you think small cap or mid cap, the data shows clearly they cannot.
  • ELSS or other thematic funds like Pharma, IT etc on an aggregate basis are still worse than Nifty Next 50.
  • Although the data shows 27% funds outperform Nifty Next 50 over a 10 year period, do note that this is the data for surviving funds.  Many funds have either folded or merged into other funds over a 10 year basis, reducing the total number of funds as well as funds underperforming. See below where typical equity funds have a survival rate of only 70% over a 10 year period.  

  • For all practical purposes, there is really no value in trying to invest in actively managed funds for a larger time horizon.  You may get a 2.14% additional return (which is not insignificant over a 10 year period) but you have a nearly 70% chance of actually getting 3.5% less return (data in blue, last column).  
I am not sure why the Nifty (or even Nifty 500) indexes are so easily being outperformed in India by the MFs.   It may have something to do with the way these are constituted - if you know of any good reasons, do drop a comment.

Additions and corrections welcome. 


1 comment:

Amit Agarwal said...

Food for thought...