If you ask Indian investors what returns would make them happy, most would quote a figure between 10-20%, with around 15% being the sweet spot for many that I know of. Is that a good number, especially for the equity markets? Should you be happy if your equity investments in stocks or mutual funds gave you that much returns in any particular year?
Most fund managers (either in mutual funds or Portfolio Management Services) have a defined objective to beat a particular index, and as such a common performance measure is to compare the total returns of the fund against that of its benchmark. This way, you can see how much value the manager adds & analyse if they are worth the additional costs.
For example, if your mutual fund is benchmarked against the Sensex-30, compare the relative performance of the fund & the index over the same time period (e.g. 1-year) . If the Sensex-30 has returned 5%, and your fund has returned more than that net of costs, then that’s good - and if the fund has returned less than 5%, then it’s said to have underperformed the index.
The S&P Dow Jones Indices maintains a scorecard that tracks the performance of such actively managed mutual funds in India. Called the S&P Indices Versus Active (SPIVA) India Scorecard, it provides a semiannual update on the performance of “actively managed Indian mutual funds compared with S&P DJI indices in their respective categories.”
The most recent SPIVA report
for the calendar-year ending 2018 came out in the first week of April, and the results are quite interesting. More than 91% Large-Cap
and 95% ELSS funds underperformed in the 1-year period
- this becomes 90.59% and 88.10% respectively over a 3-year period.
It means that if you are an investor in such an active mutual fund, odds are that you ended up paying more to get relatively lesser returns. You would’ve been better off paying far less & investing in an index fund or an ETF that tracks the index.