Most actively managed funds have lagged the Bombay Stock Exchange’s benchmark index in performance during the last 1-3 years. As on Friday, May 9, the Sensex generated a one-year return of 21.5 per cent and a three-year compounded annual return of 37.2 per cent. The performance of most equity diversified schemes pales in comparison to the Sensex.

Only 67 of the 168 equity diversified schemes, or two-fifth, with a minimum one-year record have outperformed the Sensex over the last 12 months. If we look at the three-year period, the performance is worse. Only 27 of the 100 schemes with a minimum three-year track record have been able to beat the 30-stock index. Thus, over a longer time horizon, the percentage of actively managed schemes that did better than the Sensex drops quite dramatically.

Sandesh Kirkire, Kotak Mahindra AMC chief executive officer, said, “As markets mature and become transparent, similar information becomes accessible across the markets and that’s the reason why actively managed funds find it difficult to beat the index.”

The index funds and exchange traded funds (ETFs) that mimic the Sensex and are passively managed, lag the Sensex’s growth by only 1-2 percentage points. At present, only two fund houses — UTI Mutual Fund and Prudential ICICI — have ETFs tracking the Sensex. If we look at the recurring fee charged by actively managed funds, it stands at 2.5 per cent, whereas that of a passively managed ETF funds stand at 1.5 per cent. Thus, in a scenario where most equity diversified schemes that charge a higher recurring fee but deliver returns that are no better than the passively managed schemes charging a lesser amount, it makes sense for investors to look at the ETFs for a higher asset allocation of their total equity exposure.

... contd.