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Why is my Mutual Fund doing worse than Nifty?

Over the past 20 years or so, we have seen that the top equity mutual funds have consistently done better than the market benchmarks. Better managed diversified equity funds have delivered an annualised return that is about 3-4% better than the Nifty. This gets reflected in the return delivered by Scripbox portfolio recommendations.

The current financial year, till date (Jan-Jun 2018), is one of the rare periods where the average diversified equity fund is performing worse than the Nifty. Out of top 25 funds (by size as on 31 Dec 2017), 24 funds are doing worse than the Nifty as on date.

2 reasons why mutual funds normally do better than the Nifty

  • Equity mutual funds are managed by professionals, who follow investing best practices. In India, money managed by equity mutual funds account for a small proportion of the overall market, and the professionals would have a natural advantage over the retail investors.
  • In different periods, the mid-cap stocks had presented better opportunities than the large caps, and by positioning the portfolios as a reasonable mix of mid and large caps, these mutual funds have shown better performance than the market index which is large caps only.

So why is it different now?

  • In the current period, however, the mid-caps have done far worse than the Nifty (Nifty is up 2.63% whereas the BSE Midcap Index is down 9.86%). Since most funds had a mix of mid cap and large cap investments, performance is affected.
  • One of the best performing sectors in the current year is the IT stocks (BSE Tech Index is up 21% YTD), partly due to the weakening Rupee. However, most funds were under invested in this sector relative to its weight in the Nifty (Nifty has weight of 12.68% In IT stocks whereas Scripbox recommended funds, for example, have a weight of 6.97%). Therefore gains made by these stocks while reflected in the Nifty, don’t show up in the mutual funds.

What should I do?

Mutual Funds, in the selected baskets of funds, are run by professionals who have a long track record of doing well (defined as performing better than the market). There will be periods when the professionals trail the market, but history suggests that these periods don’t last too long. We strongly believe investors should stick with their long term investing goals, as equities as an asset class is highly likely to do well compared with alternative assets classes. India is a growing economy, and by investing in equities, one can benefit from the growth of companies addressing the growing needs of the Indian customer.

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