Nifty and Sensex are breaking new all-time highs while most portfolios are still near their all-time lows. This imbalance of return is attracting more and more stock market participants/investors towards Index Fund/ETF. A question arises whether this love for Index Investing will last forever or is it just Love at first sight.  For most people love begins at first sight and then after a few years, their eyes start wandering around. As per the recent trends, it wanders within a year. Why is it so? Is it due to lack of love for their partner ? or Is it because they don't know the value of their partner ? or Are we becoming more impatient and always in the look out of the new? - Drop your view in the comment below.




Active Fund vs Index Fund

Here are my observations on the last 5 years performance of Active Funds vs Index Funds.


Why only 5 years of data for observation? - As I have considered only direct funds, which had started 5 years back by SEBI.

Funds Selected and their criteria? - 
  1. Index Fund: UTI Nifty Index Fund-Direct Plan
  2. Index Fund: ICICI Prudential Nifty Next 50 Index Fund-Direct Plan
  3. Large & Mid Cap Fund: Mirae Asset Emerging Bluechip Fund-Direct Plan 
  4. Large & Mid Cap Fund: Canara Robeco Emerging Equities Fund-Direct Plan
  5. Multicap Fund: Motilal Oswal Multicap 35 Fund-Direct Plan(Erstwhile Motilal Oswal MOSt Focused Multicap 35 Fund) 
I know these are not directly comparable funds. The reason for selecting the above funds are to check the performance of funds based on 3 broad categories: 
  1. Index Funds vs Active Funds
  2. Importance of Fund Selection 
  3. Importance of Fund Holding 
You can change permutation and combination as per your well and share your observation in comments below: 

1. Index Funds vs Active Funds

  • Out of the top two indexes Nifty 50 and Nifty Next 50. Only Nifty 50 has outperformed the rest of the funds in the past 1 year. 
  • In the last 1 year, only Mirae Asset Emerging Bluechip Fund (which is 50% Large Cap & 50% Midcap usually) performed in line with the index Nifty 50.
  • An index investing is a high performing strategy in the short term but, low performing strategy in the long term. 


Active Fund vs Index Fund - 1 Yr
Active Fund vs Index Fund - 1 Yr

2. Importance of Fund Selection 

  • In the last 3 years, again Mirae Asset Emerging Bluechip Fund has outperformed all the selected funds. 
  • If you compare, Mirae Asset Emerging Bluechip Fund performance with its peer Canara Robeco Emerging Equities Fund, you can easily observe that Canara Robeco Emerging Equities has significantly underperformed in the last 1 year due to which 3-year performance is severely impacted. 
  • So, choosing a fund based purely on past performance can be an unsuccessful strategy, as funds can perform in a cycle. Prefer consistent performing funds. 

Active Fund vs Index Fund - 3 Yr
Active Fund vs Index Fund - 3 Yr

3. Importance of Fund Holding 


  • In the last 5 years, again Mirae Asset Emerging Bluechip Fund has outperformed all the selected funds. 
  • In the long term, large and mid-cap funds can outperform multi-cap funds. 
  • A focused strategy (even with QGLP) is good for the long term but, can underperform significantly in the short term.  


Active Fund vs Index Fund - 5 Yr
Active Fund vs Index Fund - 5 Yr

All the above comparisons are done on dt. 11th Jun '19 using Value Research Online 

Conclusion

  • In investing, changing an investment strategy based on 1-year performance is not a good strategy. 
  • Large and Midcap Funds have outperformed Index Funds in the past and the same can be expected in the future too. 
  • Focused investing can underperform due to high investing during peak performance and heavy selling during the fall. 
These are my views and not a recommendation. Share your view in the comment below. 


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