While studying on how actively managed Mutual funds have fared against Index returns. I was expecting that Index returns would be better but what I didn’t expect was the extent to which Index returns have outperformed the mutual funds both in terms of % of the excess returns and number of MFs which it has beaten.
Some numbers:
In last 12 months in Direct funds category, 86% of large cap funds have underperformed Nifty 50 returns by an average of 2.6%
Surprisingly, the number keeps getting higher with time as 92% of the large cap funds have underperformed Nifty 50 returns by an average of 1.6% when it comes to the 5 year horizon.
Similarly, Almost 50-60% midcap funds have underperformed the Midcap 150 index returns over a 1-7 year timeframe.
If this is the state of Direct funds, One can only imagine how the Regular funds returns would be with higher Total Expense Ratios (TERs)
For eg: 100% of Regular large cap funds have underperformed Nifty when we look at 7 year returns by an average of 2.2%, whereas the number was at 79% for Direct funds with an underperformance of 1%
Both my midcap and smallcap funds have been underperforming their respective indices.
Henceforth, I would only be putting money in no load index funds with minimal expense ratios. Hoping for Zerodha AMC to come up with more such products.
Looking at all this i have to agree with the friends saying Index ETF is a better option for the long run. Thanks for the analysis and the info Meher Boss.
The best idea that has been working out for me and my friends is buy Banknifty Index, Pledge and Hedge.
It will generate more money than Index returns. Majority of people don’t know how to hedge using options.
I agree for large caps. But i don’t agree for mid and small caps. In a long run, most of the active midcaps and smallcaps beat the index.
For large caps, Index is the best option
For derivatives traders, ETFS are good option.
I would suggest a combination of Multicaps and Flexicaps does the work and beat the Index in long run.
Issues with Index:
During bear market, active fund managers are holding cash 5%-10%. But that can’t be done in Index funds
Unlike U.S, in India passive funds are charging too high. average 0.2%. Few funds like Navi is charging very less but tracking error is huge
Some higher PE stocks like Adani groups are occuping the Index which is hardly hold by active fund managers other than Quant
My suggestions:
Go for Index funds for large caps of portfolio
Avoid pure mid and small cap funds (Both active and passive)
Add 2-3 active multicaps to the portfolio (some thing with International exposure like Parag Parikh)
Disc: I have been investing only in active funds since couple of years and my fund managers generated huge alpha. During 2020 market crash my portfolio is lesser negative than Index. Downside protection is high for active funds
One thing i learned in my investment journey is systematic investment and keeping the portfolio untouched brings you more money as well as peace of money
It is not high, it exists only for active funds, as the funds are actively managed by the decisions taken by the management in various ways, and it does not exist for passive funds. When an index falls, so does its corresponding fund almost in the same proportion, excluding the tracking error.
Passive is for people who have time on their side, who don’t want the extra % generated by active funds, who believe the indices will go up with time, and can wait till that happens.
For those who want to limit the fall, who look for downside protection than the upside performance, active funds are suitable.
HDFC Equity used to be a great fund, It struggled for a few years recently but came back nicely this year. I got a decent exit from it after holding for more than a decade now. Fund manager is gone now though.
Similarly ICICI value discovery has done well.
But they will always have periods where they don’t do as well and you will have some uncertainty. Also, out performance has reduced now a lot. Index funds are hassle free, we don’t need to chose.
Been doing exactly this for 2 years now. I may not call it compete hedge. I keep selling monthly calls which are above 5 percent from spot. So either I get 5 percent return per month from nifty or I get to keep premium. Unless nifty goes up more than 30 percent in a year I will outperform nifty.
Try to improve your strategy. Covered call give rental income but won’t offer hedge.
There are ways to do cheap and easy hedges. One clue is to use butterfly. Try to find out.
But how scalable is the covered call strategy? I mean at current prices, you need to own 18L worth of niftybees to be able to write 2 lots of calls (with 1.5-2L margin required). i.e. to deploy every lakh of margin money, you need to hold roughly 10L worth of the underlying.
And the other complain I have with cc is, like you mentioned, in case the underlying rallies like 20-30%. I’ll miss out on the entire upside. Aren’t these the once-in-a-decade (or longer) opportunities which help indexes average the long term 12% returns?
My capital is much bigger than this. So it works out.
I will be doing a lot of adjustments with weeks options. The underlying is all pledged and on expiry days I sell deep OTM which has absolutely no chance to come ITM and generate 10 percent per annum returns. So when I consider all of this so far I am able to generate 40percent XIRR over a period of 5 years. Well. I know some day it’s not gonna work. For now I have no complaints.
