Domestic financial institutions were supposed to have made all the smart moves in the past two months—buying stocks at low levels when foreign institutional investors (FIIs) were selling in panic, and intermittently booking profit at higher levels. Mutual funds (MFs) were at the forefront, buying equities worth Rs5,150 crore and accounting for about 50% of all the inflows coming from the domestic financial institution (DFI) segment in the past two months.

But a look at their NAV (net asset value) performance since 24 July reveals that not many MF schemes benefited from the trading done in the past two months. According to data collated by, less than 39% of equity schemes have managed to outperform the S&P CNX Nifty and the S&P CNX 500 since 24 July 2007. The study includes 201 equity and tax-oriented schemes, and excludes sector-specific schemes.

True, many MF portfolios give a high weightage to mid-cap stocks, and neither the Nifty nor the S&P CNX 500 would be proper benchmarks for such funds, but note that National Stock Exchange’s CNX Midcap index has risen by an even higher rate in the past two months. If the Midcap index were used as a benchmark, a higher number of schemes would end up as underperformers.

Most flagship schemes were missing from the list of outperformers and the top three performers, Escorts Growth Plan, Escorts Tax Plan and Taurus Libra Taxshield, were all big surprises. Few investors would have benefited from the performance of these funds—their cumulative assets under management were less than Rs15 crore, piddling in comparison to the industry’s total assets of ore than Rs1.5 trillion. Among the top 10 schemes in terms of assets under management, only Franklin India’s Flexi Cap Fund and Reliance’s Equity Fund managed to beat market returns.

The industry’s poor show has to do with their performance in the past one month, after the markets started recovering from its lows on 21 August. While the Nifty and the CNX 500 index have risen by about 19% since, less than one-fifth of the funds have been able to beat that return. In terms of assets under management, over 90% of investor money was parked in funds that underperformed in the past month. However, the industry did exceedingly well when the markets fell between 24 July and 21 August. Over 90% of all equity schemes outperformed the market return of -12%.

Similarly, equity plans of Ulips (unit-linked insurance plans) run by ICICI Prudential Life Insurance and Bajaj Allianz Life Insurance (the two largest private sector insurers) also underperformed the market in the past two months. The maximizer plan of the former’s Lifetime plan rose 4.2%, while the latter’s equity gain plan in the Unit Gain series rose 4%, falling short of the 4.7% rise in the Nifty between 24 July and 21 September. Insurance companies, too, had bought equities in July and August when FIIs were selling.

The key reason behind the underperformance is that the rally in the past month has been low on market breadth and a few large stocks have driven the markets to new highs. For instance, five Mukesh Ambani and Anil Ambani group companies have accounted for 30% of the rise in the Nifty in the past month. Portfolios which did not have a commensurate weightage for these companies would have found it extremely difficult to outperform the market. Similarly, during the fall between 24 July and 21 August, the maximum damage was among large-cap shares. Mid- and small-cap shares were relatively unaffected. As a result, most MFs and insurance schemes outperformed, thanks to their diversified portfolios.

Needless to say, mutual funds and insurance schemes are investment tools for the long term, and judging their performance for a two-month period would not be appreciated by most fund managers. Nevertheless, the results of the study make it clear that despite the bargains domestic financial institutions were able to extract from their foreign counterparts, domestic fund managers have found it difficult to beat the volatility in the past two months.

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