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Did Active Mutual Funds Beat Index Mutual Fund? 10 Year Horizon Status Check

Here I checked how a portfolio of active mutual funds fared against passive index fund – for 1 year horizon. But such short horizon analysis is not a very good way to make long term investment decisions.

Going to 10 year horizon now. Selection criteria remains same as earlier. Just reproducing here for ready reference:

-          All Large cap funds, excluding index or ETF for April 2002 – March 2012

-          Minimum / maximum AUM: None whatsoever. We don’t want to be biased towards small or large funds

-          Top 5 funds, basis only one criterion – “Returns” shortlisted. We are keeping it simple!!! No complex risk parameters like Sharpe ratio, Treynor ratio etc

-          Funds allocated in equal proportion to all 5 funds. No bias again!!!

-          Same fund allocated to top three Nifty 50 index funds available for the period

-          Performance compared for active portfolio with index portfolio for April 2012 – March 2022

 Which five large cap funds make it to our shortlist basis outsized performance in April 2002 – March 2012 period?

-          HDFC Top 100 Fund

-          Tata Large Cap Fund

-          Franklin India Bluechip Fund

-          Taurus Large Cap Equity Fund

-          LIC MF Large Cap fund

 

We put our money (hypothetically) in equal proportion in these funds and compare performance for the period April 2012 – March 2022 with the index fund portfolio comprising three Nifty 50 Index funds (ICICI Pru, Franklin India and UTI).

The index fund portfolio delivered annualized ROI of 13.11% on weighted average basis. Here I opined we need at least 2.5% alpha over index funds to justify investing in active funds over long investment horizons. Going by this, our benchmark for active fund portfolio for the period April 2012 - March 2022 stands at 15.61% annualized ROI.

How did our active fund portfolio fare? On weighted average basis, active fund portfolio delivered annualized ROI of 12.34%, nearly 0.77% less than index fund portfolio. Mind you, we were looking at annualized ROI of upwards 15.61% from active fund portfolio. Let alone getting an alpha, active fund portfolio did not even match up to index fund portfolio performance.

There we go – looking at numbers the appropriate way again shows conventional view regarding active funds beating index funds in Indian context, IS NOT ACCURATE. Even for a long horizon of 10 years!!!

Credit where due: Data source is “valueresearchonline.com”

   

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