While Indian equities' benchmark Nifty 50 pared over 4% from its lifetime high levels in September, most actively managed large-cap funds faced a relatively muted decline.
Though the outperformance of actively managed mutual funds amid market downturns is well recorded, the same has not held true amid uptrends over longer periods. However, the calendar year 2024 so far has seen an unusual flip in this trend.
While the Nifty 50 rose over 15% so far in 2024, of the 30 large-cap funds, 29 have delivered higher returns than that.
"A key reason for funds' outperformance is how they allocate the heavyweights as compared to the benchmark index," Mohit Gang, co-founder and chief executive officer of Moneyfront said.
"Large-cap funds are also allowed to invest in the Nifty Next 50 stocks, which have done considerably better than Nifty 50 stocks," he said.
The Nifty Next 50 index has delivered a 42% return during the calendar year so far.
Baroda BNP Paribas Large Cap Fund delivered a 27.8% return as the top performing fund in the year so far, followed by DSP Top 100 Equity Fund, and Invesco India Largecap Fund.
Over longer periods, most large-cap funds have struggled to meet or beat their respective benchmarks.
During the trailing 12-month period, of the 30 large-cap funds, 16 beat their benchmarks. However, this percentage falls over the three-year period, where it fell to 50%.
The five-year period saw the percentage of outperforming funds fall to just over 30%, while over the 10-year period they fell even below that.
The Nifty 50 is widely suggested to be treated as a core part of one's portfolio, given the stability in returns provided by the constituents which have a large market capitalisation, and hence tend to be less volatile amid different market cycles and corrections.
But even as the Indian equities face a stellar bull run, for large-cap funds to outperform their benchmarks has not been the norm. This has brought an argument for investing in index funds, which are passively managed, and have a lower expense ratio.
An expense ratio is the additional fee paid to the mutual fund house in order to manage the fund's portfolio. This tends to be higher for actively managed mutual funds.
Therefore, for actively managed mutual funds to provide an advantage, they need to outperform the benchmark by the total expense ratio, in order for them to be a better pick.
"Over a 15–20 year period, I'd prefer investing in a passive fund tracking the index, as over longer periods, it is difficult for fund managers to beat their benchmarks under the current guidelines for allocation," Gang said.
As a benchmark, a total returns index is usually considered, which also includes returns made by dividends received if one were invested in the constituents, he pointed out.
"In order for the fund manager to outperform, they also have to make up for the difference made by the total return index, as well as the expense ratio," he said.
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