Most active MFs underperform benchmark index

In the latest edition of S&P CRISIL SPIVA for half year ended 2011, it also pointed out that within these two categories, a higher proportion of large cap equity funds underperformed their benchmark vis-à-vis in the diversified equity funds category. The level of outperformance is highest for the 5-year time frame. Typically, large cap equity funds are restricted to stocks that have a higher market capitalisation.

Diversified funds, in contrast, have a wider choice than large cap funds as they can take exposure across market capitalisation. Therefore, diversified equity funds offer a greater probability of generating excess returns.

In the ELSS category, investments in which are intended for tax saving and typically have a 3-year lock-in period, 57 and 65 per cent of the funds underperformed the benchmark S&P CNX 500 over the 3 and 5 year time frames, respectively. However, 62 per cent of the funds outperformed the benchmark over a 1 year 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 1 year period. This highlights the fact that funds with higher assets under management performed better than smaller peers.

Within the equity funds category, large cap funds had the lowest survivorship across 5 years, at 75 per cent, followed by the diversified equity funds at 81.43 per cent. This was mainly on account of scheme mergers and consolidation by fund houses. The ELSS category was the only category to witness 100 per cent survivorship across all three time frames (1 year, 3 years and 5 years). This was mainly on account of the 3-year lock-in period prescribed in these funds.

Further, the category's asset-weighted returns were higher than equal-weighted returns, indicating the dominance of larger funds in the returns tally. The outperformance of debt funds was largely a factor of active duration calls in a volatile interest rate environment.