Most active funds fail to beat benchmarks

A study by S&P and CRISIL says majority of actively managed mutual fund schemes in India have underperformed their respective benchmarks; Tarun Bhatia of CRISIL says the underperformance highlights the difficulty in picking consistently successful stocks

Mumbai: A study by Standard & Poor’s and CRISIL shows that majority of actively managed mutual fund schemes in India have underperformed their respective benchmarks over the five-year period ended December 31, 2010.

A greater number of large cap equity funds failed to beat the S&P CNX Nifty, a benchmark index for large cap companies listed on the National Stock Exchange (NSE), according to the findings from the S&P’s Index Versus Active Funds (SPIVA) scorecard, produced in partnership with CRISIL.

S&P Indices, the world’s leading index provider, said the underperformance over the most recent one-year period was particularly glaring. Over 77 per cent of large cap-oriented equity funds produced lower returns than their benchmark index.

It said larger funds, however, have performed better relative to smaller funds across all fund categories over longer time frames.

Tarun Bhatia, Director - Capital Markets at CRISIL, said “Over half of diversified equity funds underperformed the S&P CNX 500 benchmark over three and five-year time frames. If you also consider that approximately 78 per cent of funds in ELSS failed to beat the benchmark over a five-year period, this highlights the difficulty in picking consistently successful stocks.”

Simon Karaban, Director of S&P Indices, Asia Pacific Research, said “the scorecards across the US, Canada, and Australia have shown similar results to that of India. There is a striking resemblance to other well-established markets in the degree to which actively managed funds have underperformed over a five-year time horizon, particular in relation to domestic equities.”

Benchmark indices also outperformed actively managed fixed income funds in the last one-year period, outpacing approximately 87 per cent of funds in the gilts category, despite the category exceeding benchmark performance over the 3-year period, S&P said.