Recently, there was some buzz on social media and a few articles about how large cap mutual funds have made a “comeback”. In this article, we discuss the performance consistency of these funds using the freefincal equity mutual fund outperformance screener (published monthly).
Disclaimer: Fund performance reports present return and risk analysis of a fund with representative benchmarks and not investment recommendations. It must be expressly understood that the data below reflect only past performance and is in no way an indication of future performance. Our investment recommendations are: Handpicked List of Mutual Funds (PlumbLine).
First, we shall look at trailing returns and risk. For more details, see A screener to select mutual funds with lower risk & higher return.
We consider the returns and standard deviation (volatility) over the last 1Y,2Y,3Y,4Y and 5Y as of 5th April 2024. Then, we filter funds with higher returns and lower risk than the benchmark for all five durations. This filter is pre-applied in the screener file.
Only three out of 31 large cap funds make the cut compared to Nifty 100 TRI. No active large cap fund has outperformed the Nifty 100 Low Volatility 30 Index! Next, we consider rolling returns.
Rolling return outperformance consistency: the large cap fund returns are compared with category benchmark returns (Nifty 100 TRI and Nifty 100 Low Volatility 30) over every possible 3Y, 4Y and 5Y period from 1st Jan 2013 (1Y and 2Y data is also available in the file). The higher the outperformance consistency, the better. Suppose 876 fund returns were compared with 876 benchmark returns, and the fund has beaten the benchmark 675 times. The consistency score will be 675/876 ~ 77%.
Five years:
- Only 9 out of 26 funds have a rolling return outperformance consistency score of 70% or more when compared with Nifty 100 TRI (500 rolling returns data points is an additional requirement)
- Only 2 out of 26 funds qualify based on the same filter when compared with NIfty 100 Low Volatility 30 TRI
Four years:
- Nifty 100 TRI: 7 out of 27 funds qualify
- Nifty 100 Low Volatility 30 TRI: 1 out of 27 funds qualify
Three years:
- Nifty 100 TRI: 9 out of 27 funds qualify
- Nifty 100 Low Volatility 30 TRI: 2 out of 27 funds qualify
We also studied the rolling returns of regular plan funds vs Nifty 100 TRI for longer durations.
- Seven years: Only 5 out of 19 funds qualify
- Ten years: Only 8 out of 19 funds qualify
- Twelve years: Only 8 out of 17 funds qualify
- Fifteen years: Only 2 out of 10 funds qualify
There is no comeback of any sort. Active large cap funds continue to struggle against benchmarks. But then again, so do active mid cap funds, small cap funds, flexicap funds, etc. See Active Mutual Funds Outperformance Consistency Report (March 2024).
Dear young earner, don’t make the mistakes I did. Identifying an active fund that will consistently outperform in future is not possible. Keep it simple and buy the index (Nifty or Sensex). That is enough.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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