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Business News/ Opinion / Big or small, equity funds have outperformed benchmarks
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Big or small, equity funds have outperformed benchmarks

On an overall basis, 69% of the equity funds outdid their category benchmarks in the combined phase

Hemant Mishra/MintPremium
Hemant Mishra/Mint

Large-cap funds are widely believed to have delivered greater returns than diversified and mid- and small-cap equity funds following the recent rally in the S&P BSE Sensex, which regained its all-time highs at the start of this month. But is such a lateral evaluation appropriate? No, because a mutual fund’s performance should be measured against its relevant benchmark or peer group, or you risk comparing apples with oranges. Equity funds, based on their investment objective and allocation, are classified into large-cap, diversified and mid- and small-cap funds. Crisil assessed their performance against their category benchmarks, which are the CNX Nifty, the CNX 500 and the CNX Midcap, respectively. The performance of equity-linked saving schemes (ELSS) was compared with the CNX 500.

The analysis showed that more than 69% of equity funds outperformed their category benchmarks between 8 January, 2008 (the previous Sensex peak), and 1 November, 2013 (the latest Sensex peak). Notably, the outperformance has been the biggest in the mid- and small-cap category, where more than 79% of the schemes outgunned the CNX Midcap index

While large-cap indices touched their historic highs, the broader market barometers are yet to do so because of the underperformance of mid- and small-cap stocks. The CNX Midcap index touched a high of 9,782.85 in November 2010, whereas the CNX Smallcap index did so in January 2008, touching 6,048.06. The two indices were 22.03% and 48.37%, respectively, below those watermarks as on 1 November, 2013.

The stock market upswings in India after the global financial crisis of 2008 can be split into two phases. In the first phase, between 8 January, 2008 (when the Sensex closed at 20,873.33), and 5 November , 2010 (when the Sensex closed at 21,004.96),the CNX Midcap and CNX Smallcap indices delivered 3.22% and -21.88% returns, respectively. In the second phase, between 5 November, 2010, and 1 November, 2013, they lost money (-21.53%and-31.88% respectively). The trend is reflected in the broader market index, too, where the CNX 500 returned -11.67% since 8 January, 2008.

Combine the two phases, and the performance of diversified and mid- and small-cap funds lags behind the large-cap schemes as they invest mainly in mid- and small-cap stocks, which have underperformed during the period. While 57% of the large-cap funds delivered positive returns, only 38% of mid- and small-cap equity funds did so (see graph). However, the mid- and small-cap equity funds delivered better returns in comparison with their category benchmark as they had 20% exposure to large-cap stocks (top 100 stocks on the National Stock Exchange by market capitalization). Even at the category level, large-cap, diversified and mid- and small-cap funds represented by Crisil-AMFI Large Cap Fund Performance Index, Crisil-AMFI Diversified Fund Performance Index and Crisil-AMFI Small and Midcap Fund Performance Index returned 9.12%, -0.27% and -3.72%, respectively,between 8 January, 2008, and 1 November, 2013. But here’s the truer perspective: While mid- and small-cap funds have delivered negative returns during the combined period, 79% of them actually outperformed their category benchmarks. Also, in the second phase,when they delivered significantly negative returns, 90% of them trumped their category benchmarks. In the second phase, 76% of ELSS funds raced ahead because they invested more—as much as 69%—in large-cap stocks. Nearly two-thirds of diversified funds with 63% allocation to large-cap stocks also outperformed category benchmarks.

On an overall basis, 69% of the equity funds outdid their category benchmarks in the combined phase (see graph). Not surprisingly, funds with higher exposure to large-cap stocks delivered greater returns. The upshot, therefore, is that investors should evaluate the performance of mutual funds against their relevant benchmarks, and keep in mind the risk-return profile of various fund categories when making investment decisions.

Mukesh Agarwal, president, Crisil Research.

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Published: 28 Nov 2013, 06:25 PM IST
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