Eight out of 10 mutual funds beat Sensex this year

For those who think equity mutual funds (MFs) make less money than direct stock investing, here is a loud wake-up call. While the blue-chip benchmark S&P BSE Sensex has given over 22.6% return this year, 86% of equity MFs -- over 8 out of 10 -- have given better gains.

In fact, investors in 10 actively managed funds have got more than double the Sensex's gain. As many as 314 of the 369 actively managed equity funds have outperformed the Sensex while on the passive management side, 60 of 64 ETFs and index funds have done the same, shows a DNA analysis of equity MFs with combined assets worth Rs 6.4 lakh crore.

In calendar year 2016, 333 (75.1%) of 443 equity MFs beat the Sensex's meagre 1.94% return. As many 67 funds posted negative returns in CY2016, while 68 funds posted doubled-digit gains in a rather lacklustre year.

Broader equity markets have done extremely well this calendar year with the Sensex crossing peaks 27,000, 30,000 and now 33,000 with elan. This bull-run has boosted the returns of equity MFs, and those fund managers who bet big on stocks linked to consumption, infrastructure, and banking have reaped bigger rewards. The top-performing funds year-to-date include Tata India Consumer Fund (56.82%), SBI Small & Midcap Fund (54.84%), L&T Emerging Businesses Fund (53.31%), L&T Infrastructure Fund (50.59%) and IDFC Sterling Equity Fund (48.55%).

Manish Kothari, head of mutual funds, Paisabazaar.com, said, "In an under-institutionalised market like India where mutual funds hold only 13% of the market capitalisation, it is easier for equity fund managers to create alpha and beat market indices such as Sensex. Moreover, Sensex is an index of 30 stocks of large, well-established and financially sound companies. An economy like India offers numerous opportunities outside of these companies, which equity fund managers efficiently use to generate benchmark-beating returns."

Equity MFs are largely of two types: actively managed and passively managed. Active management is the use of a human element to actively manage a fund's portfolio. No wonder, why active funds are amongst the best performers. Over 85% of actively managed equity funds have beaten the Sensex this year so far.

The rest 15% have struggled largely due to the presence of under-performing stocks/sectors in their portfolios. "This year, information technology and pharma thematic funds have done badly. Hence, it is no surprise that these funds are at the bottom of the charts year-to-date. Thematic funds are concentrated bets which may or may not work," points out Anil Rego, CEO, Right Horizons. None of the four pharma funds -- Reliance Pharma Fund, UTI Pharma & Healthcare Fund, Tata India Pharma & HealthCare Fund and SBI Pharma Fund -- have generated positive returns year-to-date. In case of technology funds, Franklin India Technology Fund, ICICI Prudential Technology Fund, Tata Digital India Fund and SBI IT Fund have given between 5-12% returns, much lower than the Sensex.

Retail investors should stick to diversified funds that offer an excellent way to ride the rising tide in markets. Mid- and small-cap funds are good options if one can give 5-7 years for the fund to perform. With fixed income options progressively giving lower returns, actively-managed equity MFs are emerging as a great way to beat markets and get superior risk-adjusted returns, added Rego.

On the passive management side, Indian investors buy exchange-traded funds and index funds. Here the fund's portfolio mirrors a market index and generally does not out-perform by a wide margin. About 40 of 42 equity ETFs have bettered the Sensex, with only Edelweiss ETF -- Nifty Quality 30 (15.95%)-- and CPSE Exchange Traded Fund (14.74%) failing to make the cut. Banking ETFs have given 30-40% returns, mirroring the banking index. Amongst 22 index funds, 20 products managed to beat the Sensex, with IDBI Nifty Index Fund and Taurus Nifty Index Fund missing out by just a few decimal places.

Vijai Mantri, co-promoter, and chief mentor, Buckfast Financial Advisory Services, said, "Investors should continue to stay invested in actively managed funds. Till date, a well-chosen actively-managed portfolio of MF has done much better than ETF or index funds. Actively managed funds may not have done well in developed markets. But in India, they have done exceedingly well. Over a 22-year period, if Rs 1 lakh has grown to Rs 10 lakh in index funds, then in actively managed funds the same amount would have grown to between Rs 40 lakh and Rs 60 lakh."

Mantri, who has worked as CEO at Pramerica Asset Managers and Deutsche Asset Management (India), said investors should not fall for false narrative. "Just because cola drink replaced water in the US, people expected the same in Indian markets. Similarly, just because in US, most actively managed funds underperformed indices, people expected the same in India. But this theory does not pass the scrutiny," he added.