Issues with Fund performance in India

The Indian mutual fund industry has a very high number of schemes which has been another cause for concern for regulators. In 2012-13 there were a total of 1,294 schemes, while there were only 403 of them in 2004. A high number of schemes make the job of choosing a suitable scheme for retail investors difficult. However, offering new schemes has been a marketing tool for many AMCs, and an easier route for garnering more assets. If some of them start launching new schemes frequently, others are forced to follow as they fear otherwise they would be perceived as inactive or not aggressive by investors. The regulator has been asking fund houses to rationalize so many offerings, and offer limited number of them which are truly different from each other. Some success was achieved in this regard in 2008 and 2009 when number of new schemes launched went down significantly. However, that trend was short lived and high numbers of new schemes are again being launched since then. Too many schemes make choosing suitable scheme difficult. It is also interesting to analyze how different funds have performed over the years. One way of doing this is to compare the return given by a particular fund with respect to a benchmark index. If the fund beat the benchmark on a consistent basis, say for 1/3/5 year period, it can be said to have outperformed. The argument of active management of funds and charging of fees for that purpose is justified in such cases. If, on the other hand, a fund fails to beat the benchmark index, then an investor is better served by investing in an index fund (which has lower fees being a passively managed fund) tracking the benchmark index. Since December 2009, S&P and CRISIL periodically publish a scorecard, titled “S&P CRISIL SPIVA”, comparing the performance of Indian mutual funds with appropriate benchmark indices during various time periods. Here we aggregate findings from four such reports published in December (H2) 2009, June (H1) 2011, December (H2) 2011 and June (H1) 2012, and plotted in the figure (each column in the figure indicates the proportion of funds that have failed to beat corresponding benchmark). We have selected two types of equity funds (large cap and diversified) and debt funds. We have also added a 50% (red) line for easier interpretation of what proportion of funds have outperformed; 50% being associated with the probability of two outcomes for a fair coin toss. The following observations can be made:

• A large proportion of firms has failed to outperform the corresponding benchmark for each year and for each time period considered.
• Debt funds have done relatively better; they have outperformed the benchmark indices more times compared to other two types of funds on a consistent basis. Except for one case (1 year, H1 2009) they are well below the 50% line.
• The two types of equity funds on the other hand have performed poorly over time.
• In a large majority of cases (18 out of 24) over 50% of them have failed to outperform the corresponding benchmark. Large caps have performed worse (11 out of 12 cases above the 50% line) compared to diversified funds (7 out of 12 cases). This implies if an investor was to choose a fund from each of these two categories, a toss of a fair coin on average would yield better result than seeking advice from a fund manager.

Amidst several debates and discussion on entry load and distributor incentives, the issue of underperformance of mutual funds is often lost. However, this is one concern that should receive the most attention from all stakeholders. Unless mutual funds start offering better returns and outperforming benchmark indices on a regular basis, it will be difficult to attract investors to this industry regardless of number of schemes, geographic reach or entry load.