Best Equity Funds

Actively managed schemes have done better than passively managed ones

There is much debate in the US regarding active versus passive fund management. Passive fund managers buy stocks according to their weightage in the index. Therefore, such index schemes are expected to deliver returns that are close to those of the index. As the fund manager does not have to put in much effort, the cost structure of these schemes is lower than that of actively managed schemes. In the US, costs of passively managed schemes are around 0.20% to 0.30%—significantly lower than the cost of actively managed schemes which is around 1%. In India, the cost for index schemes goes up to 1.50%; for other equity schemes, the costs are capped at 2.50%. The new mutual fund regulations are expected to increase these. Adjusting for costs, it is natural for an index scheme to underperform the benchmark by as much as 1.50% (unless, of course, the scheme allows the fund manager to deviate from the mandate and invest in other stocks). This underperformance would compound over time leaving you short of your goal if you had planned to take advantage of a long-term rise in the index.

If you expected a lump-sum investment of say Rs1 lakh to grow at 12%, the long-term average return of the Sensex, at the end of 15 years, you would have expected to accumulate a corpus of around Rs5 lakh. But had you invested this amount in an index scheme, adjusted for costs, you would have been left with just Rs4 lakh. As much as Rs1 lakh would have been eaten up in fund costs, that too, for just buying the Sensex stocks. Therefore, passive investing does not seem a feasible option if you are looking for high returns or even returns equal to those of the index.

You need to choose actively-managed funds whose managers aim to beat the benchmark indices by using a variety of techniques to pick stocks and time the market. Some will outperform their benchmarks while others will fail. In the US, over long periods, actively managed schemes do not do better than passive schemes. We doubted that it would be any different in India but there are several funds that beat the index. We recently looked at five five-year rolling periods with quarterly frequency. The average returns of 64% of the large-cap and multi–cap equity schemes (5.95%) beat Nifty (5.13%). How have index schemes performed in this period? A couple of schemes averaged above 5%; the rest of the 14 schemes averaged a return in the range of 1.41% to 4.92%.

Take a look at three-year rolling periods and five-year rolling periods with quarterly frequency from February 2005 to August 2012. In the active fund management segment, we have considered only large-cap and multi-cap schemes. There were 54 such schemes and 16 index schemes. In the three-year as well as five-year rolling periods, actively managed schemes beat the index by an average of two percentage points. Out of the 19 three-year rolling periods and the 11 five-year rolling periods, actively managed schemes underperformed the index schemes in just one three-year period.

Which schemes have performed the best?

There are more than 300 equity diversified schemes to choose from. We considered only large-cap oriented and multi-cap oriented schemes as the risk is much lower in these schemes compared to other schemes. A majority of the assets of these schemes are invested in large stable companies; hence, the returns are less volatile than those of small-cap or mid-cap schemes. But choosing the right scheme is important as well.

Out of these 54 schemes, there were 11 schemes which failed to beat the benchmark in even a single period. The top 20 schemes, in terms of average returns, beat their benchmark on all occasions. The top 10 of this category delivered an average return of 16.45% whereas the bottom 10 averaged just 6.47%.

Two schemes of HDFC Mutual Fund led the list—one large-cap (HDFC Top 200) and a mutli-cap scheme  (HDFC Equity Fund). The returns of these two schemes averaged 18.04% and 17.68%, respectively. Both these schemes, which were initially managed solely by Prashant Jain since June 2003, are now managed by him and Rakesh Vyas (since May 2012). The top five portfolio holdings (August 2012) of both the schemes are similar and include stocks of State bank of India, ICICI Bank, ITC, Infosys and Larsen & Toubro.

Following closely behind is the large-cap scheme of DSP Blackrock—DSP Blackrock Top 100 Equity. This scheme has averaged a return of 16.98% in the 11 rolling periods. Its top five holdings include HDFC Bank, Reliance Industries, Tata Motors, Hindustan Unilever and Bharat Petroleum.

Birla Sun Life Frontline Equity Fund, which invests mainly in large-cap stocks, returned an average of 16.69% in the period of our analysis. Its top five holdings include ITC, ICICI Bank, Reliance Industries, Larsen & Toubro and Infosys. HDFC Growth, another multi-cap scheme from HDFC Mutual Fund, delivered an average return slightly lower than the scheme from Birla Sun Life with 16.65%. The top five holdings of this scheme are similar to those of the other HDFC Mutual Fund’s schemes except that Divi’s Laboratories is included.

The other schemes, which have recorded returns higher than the category average, are: ICICI Prudential Dynamic Plan, Reliance Growth, Templeton India Growth Fund, Canara Robeco Equity Diversified and Franklin India Bluechip. The returns of these schemes averaged 15% to 16%.

Index Schemes

Topping the list of index schemes was HDFC Index Fund - Sensex Plus Plan. This is not a pure index scheme. The scheme takes the liberty of investing 10% to 20% in stocks that are not present in the Sensex and has succeeded in delivering above par returns. The scheme delivered an average return of 13.81% when the benchmark index averaged around 10.87%. ICICI Prudential Index Fund followed with a return of 12.41%. Two schemes from Franklin India based on the Sensex and Nifty delivered an average of 10.9% each. Tata Index Fund—Nifty Plan is one of the better performing index schemes from Tata Mutual Fund, delivering an average return of 10.68%. The three other schemes with returns close to those of their benchmark index were: UTI Nifty Fund, Canara Robeco Nifty Index and Birla Sun Life Index Fund.

Don’t bet on your index scheme to deliver a return in line with its benchmark index’s. The fund management of LIC Nomura MF has grossly failed at passive investing as well—failing to deliver even positive returns in certain periods when other index schemes have averaged 2%-3%.

Source: http://www.moneylife.in/article/best-equity-funds/28821.html