Large index funds continued to underperform in the first half of 2023 with 58 per cent large cap funds failing to beat their underlying indices and the overall underperformance being as high as 85.2 per cent.
According to S&P Dow Jones Indices – a leading index provider globally – the underperformance rates for the domestic equity and bond mutual funds have been elevated over the past three- and five-year periods.
Based on the varying performance of active managers across different fund categories, most equity large-cap funds failed to beat their benchmarks, with 58 per cent of actively managed funds underperforming on the S&P BSE 100 in the first half of 2023.
In the fixed income fund category, while the BSE India government bond index rose 4.7 per cent in the first six months, a fewer than one-sixth of active bond fund managers beat the benchmark during the period, with an underperformance rate of 85.2 per cent.
But fewer funds performed badly over longer tenure, with underperformance rates over three- and five-year periods falling to 75 per cent and 66.7 per cent, respectively.
According to Benedek Voros, director of index investment strategy at S&P Dow Jones Indices, in the early months of 2023, the Indian stock market saw some notable gains across various segments as measured in the rupee.
For example, the BSE 400 mid-small cap index not only surpassed total returns of the BSE 200, but also posted higher returns than the S&P BSE 100 by more than 5 per cent. In addition, while the BSE 400 mid-small cap index rose 12.4 per cent in the period under review, 45.3 per cent of active managers underperformed the index over that period.
However, among all fund categories included in the India scorecard, equity mid- and small-cap funds fared the best over a five-year horizon, with only 38.1 per cent of funds underperforming the BSE 400 index.
In other categories, the BSE India bond index rose 4.6 per cent but the underperformance rates of India composite bond fund managers were the highest across all categories at 95.7 per cent. Indian composite bond funds also had the lowest survival rates across all categories over the one-, three-, and five-year horizons, with a fifth of the category’s funds closed or merged over the past five years.
And the few funds that outperformed in the indices, in terms of absolute returns, are BSE 100 equity large-cap funds, which have given a year-to-date return of 58.06 per cent.
Its one-year return has been 83.33 per cent, 86.21 per cent for three years and 92.86 per cent for five years, and 61.24 per cent for the 10-year period.
The BSE 200 ELSS, on the other hand, returned 17.50 percent year-to-date, 34.21 per cent for the first year, 56.10 per cent for three years, 70.73 per cent for five years and 66.67 per cent for the 10-year period.
BSE 400 mid/small cap index returned 45.28 per cent year-to-date (YTD), 78 per cent for one year, 53.06 per cent for three years and 38.1 per cent for five years.
On the other hand, the composite BSE India bond index 95.65 per cent YTD, 94.24 per cent for one year, 65 per cent for three years and 99.30 per cent for five years. The BSE Indian government bond index returned 85.19 per cent YTD, 88 per cent for one year, 75 per cent for three years and 66.67 per cent for five years.