According to a study in US in 2014, 86% of Mutual Funds could not beat the market and that too before they charged their commissions. In the period 2004-2014, 82% of the fund managers in US failed to beat the market and those that managed to beat did so out of sheer luck. The study concluded that “the more ridiculous the name, the more expensive the mutual fund will be”. Investments should be boring. There is no reason for your investments to sound like an advertising pitch for an outback safari vacation.
Celebrity after celebrity rush to appear in advertisements in India, saying “Mutual Funds sahi hai”. Are they in true sense? Mutual Funds are certainly good for the people endorsing on electronic, print or digital media as they are well paid for their appearances. But the public have mixed feelings about their exposures and experiences.
In the light of this finding, we undertook a study to find the ability of Mutual Funds in India. For our screening, to avoid any personal bias and to be justified in generalizing our observations, we considered diversified funds that fall in the category of Market cap funds.
Since Mutual Funds are always suggested with a tag line of LONG TERM, we tracked the returns offered by Nifty and Nifty(TRI – Total Returns Index) and compared them with the appreciations shown by Mutual Funds during the same time frames. We tabulated the data pertaining to return from Nifty, if bought on 1st trading day in January of each year and held on till end of December 2020. No of schemes open in each period Vs Schemes that outperformed Nifty in the same period are presented here.
From the table above, one gets a feeling that, given a longer period, majority of Mutual Funds beat Nifty returns and hence advisable. First five values for years starting from 2010, 2011, 2012, 2013 and 2014 all ending in 31st December 2020, more than 75% of the schemes seemed to have beaten Nifty. From the year 2015 onwards, however, the story was different. Further, in four periods, less than 40% only managed to beat Nifty. All this is when we compared only Nifty but not Nifty TRI.
As we all know Total Return Index captures the dividends as cash flows and reflects the true return enjoyed by Nifty, if one continues to hold the stocks in the same proportion of Index. We then proceeded to capture the values of MF schemes compared with Nifty TRI and the table below presents them for you.
From the table above, it is firmly established that even in longer periods, less than 70% of the funds managed to beat Nifty TRI. In shorter periods, the returns pale in comparison and are disturbing to say the least. The findings of the above values indicate individual performance of MFs, if held on for the defined periods. If one holds more schemes in portfolio, the aggregate return from all of them together is more likely to be even lesser.
William Sharpe who built the famous Sharpe ratio to determine the risk reward ratio of investment opportunities said, in his study in 1975, that market timers, who attempt to predict future prices, must be accurate 74% of the times to be able to beat the market. If that service is available at a cost of 2% (what most Mutual Funds charge as fee), they must be accurate 100% to beat the market or be plain lucky. Lending authenticity to his hypotheses, in Indian MF industry, market leaders in Mutual Funds change too often in the sense today’s top performers come a cropper in the next year.
When spotting winners is not likely to be rewarding, using random approach of selecting Mutual Funds, we built 500 different portfolios of 5 schemes for each of the above periods and tested their average return with Nifty TRI. Strangely Nifty TRI returns were ahead in all cases. This proves that an average investor with multiple schemes in his portfolio is least likely to be ahead of Nifty TRI.
When we have Exchange Traded Funds (ETF) mimicking the underlying portfolio of Nifty are available at much competitive expense ratio (as against 2% or over for other schemes), why should one go to exotic Mutual Funds and end up getting much lesser return? This question is answered by the way Mutual Funds are sold in India through distributors, who are content with trail commission for so called foresight, that is clearly lacking from scientific analysis.
Does it mean investing in MF is unwise? Should investments in Mutual Funds be totally discouraged? Don’t we have an approach that is more likely to reward investors with better returns than Nifty TRI? If not in all time frames, at least in majority occasions? The answer is “Don’t lose heart! There are approaches that proved to reward investors better than Nifty and Nifty TRI on most occasions, if not all occasions”. Vivekam has one such model and all its claims can be verified by any investor at his will to determine the truth behind statements. We will discuss more about ways of beating Nifty and Nifty TRI returns in the next article(s), to be published after a few weeks.
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