Do mutual fund managers justify their fees? Here’s how fund alpha compares with management fees

A large proportion of Indian Equity Large Cap Funds, over longer horizons, underperform their respective category benchmarks (see Exhibit 1a). Our  SPIVA India Year-End 2019 research evaluates the performance of active fund managers based on net-of-fees returns (i.e., gross returns less the management fees). However, this begs the question to whether or not active fund managers fare better when evaluated based on gross returns? If we look at this research on a  gross-return basis (see Exhibit 1b). One can notice that in most categories, even without the deduction of management fees, still a fairly large percentage of active funds failed to beat their benchmarks. For example, over the 10-year horizon, more than 40% of active funds in the large-cap and mid-/small-cap categories underperformed the S&P BSE 100 and S&P BSE 400 MidSmallCap Index, respectively (see Exhibit 1b). Even the government and composite bond categories had over 65% of their funds underperform their respective benchmarks based on gross returns. An investor may therefore be wary of paying a management fee in return for worse-than-benchmark fund returns even on a gross-return basis.

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