Performance of Actively Managed Mutual Funds with the Benchmark Index

Performance of Actively Managed Mutual Funds with the Benchmark Index 

M K Amitha¹,  S Pavan Kumar²

19MBA1006¹,  19MBA1030²

VIT BUSINESS SCHOOL, VIT UNIVERSITY, CHENNAI, TN

ABSTRACT:

A Mutual fund means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments or gold or gold-related instruments or real estate assets. Mutual Funds are managed by qualified experienced professionals who work for the achievement of the investment objective of the fund. Diversification of stock, liquidity, less transaction costs and transparency features support the investors to invest regularly regardless of market trends. Exchange Traded Funds and Mutual Funds share a great deal for all intents and purposes. Both types of funds consist of a blend of a wide range of benefits making it difficult for investors to differentiate. Though ETFs have the same features as Mutual Funds investors are more interested in the latter. Mutual Funds are actively managed funds whereas ETFs are passively managed and based simply on a particular market index. Exchange-Traded Funds are gaining popularity in the markets and are likely to see continued growth in the next five years. They will continue to be an attractive option for investors looking for a low-cost and low-risk to diversify their portfolios. The main purpose of the study is to understand the performance of Mutual Funds and the growth of ETFs in India.

INTRODUCTION:

  A Mutual fund is a shared fund that pools money from multiple investors and invests the collected corpus in stocks, bonds and short-term money-market instruments, other securities or assets, or a combination of these investments. Mutual Funds are operated by professional managers who allocate the fund’s assets and tries to produce income for the investors. Mutual Funds invest in a massive number of securities. Types of Mutual Funds are:

·         EQUITY FUNDS - Stock Mutual Funds are chiefly ordered by organization size, the venture style of the property in the portfolio and topography.

·         BOND FUNDS - Bond funds are the most well-known sort of fixed-pay Mutual Funds, where financial specialists are taken care of a fixed sum on their underlying venture.

·         MONEY MARKET FUNDS - Money advertise Mutual Funds are fixed-pay Mutual Funds that put resources into great, transient obligation from governments, banks or partnerships.

·         BALANCED FUNDS - Also known as resource assignment funds, these speculations are a mix of value and fixed-salary funds with a a fixed proportion of ventures.

·         INDEX FUNDS - A file support is a kind of mutual reserve whose possessions match or track a specific market file, for example, the S&P 500. Record funds have detonated in fame as of late.

·         ALTERNATIVE FUNDS - This catch-all class of funds incorporates Mutual Funds, oversaw prospects, products and land speculation trusts. There is likewise developing financial specialist enthusiasm for corporate socially mindful Mutual Funds.

                                                                                                                                             

    An Exchange-traded fund is a venture subsidize exchanged on stock trades, similar to stocks. An ETF holds assets, for example, stocks, products and securities. ETFs might be alluring as investments in view of their low costs, tax efficiency, and stock-like structures. One can buy exchange traded fund shares from any brokerage. The Exchange-Traded Funds are designed to mimic the performance of the commodity or the index. ETFs signifies an ideal type of asset which helps to construct a diversified portfolio for most individual investors. Investing in ETFs is becoming accepted and popular because it gives you, as an investor, the opportunity to invest in national and international securities. An ETF can follow a fringe scope of stocks, or even endeavor to imitate the profits of a nation or a gathering of nations.

                                                                                   

FEATURES:

S no	Exchange Traded Fund	Mutual Fund
1.	ETFs are a good investment option for the small investors.	Mutual Funds are generally bought through Systematic Investment Plan which otherwise would be extremely expensive.
2.	An ETF pays out dividend received from the stocks on a quarterly basis.	Open-ended Mutual Funds can be redeemed totally or partially at the present value.
3.	Exchange-Traded Funds offer great tax benefits than the usual Mutual Funds as they are managed stocks.	Mutual Funds are managed by qualified experienced professionals who works towards the fulfilment of the investment objective of the fund.
4.	The ETF has a low annual fee when compared to traditional Mutual Funds.	Regular investing irrespective of the market trends help you average your investment cost over a period of time.
5.	ETFs are viewed as generally safe speculations since they are minimal effort and hold a      basket of stocks or different securities, expanding diversification.	Mutual Funds diversifies your investments by investing in different asset classes.
6.	ETFs can be brought on margin and sold quick.	There is a wide range of Mutual Funds schemes available to meet individual goals. It also offers flexibility in the mode of investments such as SIP and Lump sum.

  

GROWTH OF MUTUAL FUNDS AND ETFS IN DEVELOPED MARKETS LIKE US

Mutual Funds:

As of 2019, the US total Mutual Funds net assets value reached USD 24.51 trillion whereas it was 13.05 trillion in 2012. The market has registered a CAGR of 9.42% in the period 2012-2018. The main reasons Mutual Funds have become popular due to the remarkable resilience shown by the US economy and the aggressive monetary easing by the federal reserve. The intrinsic diversification makes Mutual Funds generally safer than investing in individual stocks.

As of April 2019, there were absolutely 8042 enrolled Mutual Funds. 44.8% percent of family units possess the MF ventures across the nation. BlackRock funds top the list of Mutual Funds followed by Vanguard, Charles Schwab and Fidelity Investments.

(Source: Investopedia)

Exchange-Traded Funds:

The U.S.-based exchange-traded funds have reached a record of $4.6 trillion in assets under management as of 2019, offering 2,096 ETFs to investors. The CAGR of ETF is 19.31% in the period of 2012-2019. The ETF industry globally is $6.18 trillion offerings 6970 ETFs. The poor performance of active investment managers has changed the investing pattern of individuals to passive investing called ETFs.

The first five ETF suppliers - iShares by BlackRock, Vanguard, SPDR, Charles Schwab and First Trust - direct 87% of the total asset in the ETF showcase, with iShares and Vanguard alone overseeing 65%.

(Source: Investopedia)

  

GROWTH OF MUTUAL FUNDS AND ETFS IN INDIA

Mutual Funds:

As of 2019, the total Assets Under Management of Indian Mutual Funds reached to Rs. 24.48 lakh crores from Rs. 8.2 lakh crores in 2012. The CAGR of Mutual Fund is 16.9% in the period 2012-2019. The total number of Mutual Funds schemes offered in India are more than 2500 as on date. Mutual Funds AUM comprised 10% of total bank stores in 2013, expanding to around 18% at this point. This has brought about higher investment through the systematic investment plan (SIP) course. Monthly SIP business developed every year by 28% to Rs 8,518 crore in the period of 2016 and 2019. The main reason behind investors still sticking to Mutual Funds is to achieve a higher rate of return and that they are managed by experts.

ICICI Prudential Equity & Debt Fund, Axis Bluechip Fund, L&T Midcap Fund, HDFC Small Cap Fund and HDFC Mid-cap Opportunities Fund were some of the top Mutual Funds in 2019.

(Source: Economic Times)

Exchange-Traded Funds:

The Assets Under Management of ETFs according to NSE records has been augmented from Rs.55,640 crores in 2012 to Rs.1,34,626 crores as on March 2019. The CAGR of ETF is 13.45% in the period 2012-2019. ETF became a popular investment option due to its cost benefits, tax benefits and other benefits. But the awareness about ETFs among investors is growing due to efforts taken by Securities and Exchange Board of India, National Stock Exchange and Government of India. Also, the global financial crisis of 2008 is one of the key considerations for ETFs gaining a place in investment portfolios.

Some of the top ETFs in 2019 - Nippon India ETF Nifty BeES, Nippon India ETF Bank BeES, Motilal Oswal Midcap 100, HDFC Gold Exchange Traded Fund and Nippon India Exchange-traded fund Liquid BeES.

(Source: Paisabazaar.com)

ANALYSIS:

The scope of our analysis is to review the performance of actively managed Mutual Funds. For this purpose, we analyzed the funds, based on their category and their respective benchmark index. AMFI- Association of Mutual Funds for India provides the classification of these funds, based on the investment objective, on which a fund is floated. For example, A Large Cap Mutual Fund, typically invests in companies with large market capitalization.

For our purpose of analysis, we compared the universe of 127 funds, across the category of Large Cap, Large and Mid-Cap, Mid Cap, Multi cap and Small Cap for the period of 1 year, 3 years, 5 years and since inception. The table provides a category of the funds, the universe of funds in the category and the benchmark index. The Benchmark index for each of these funds is defined at the time of floating fund, a typically large-cap benchmark is NIFTY50, S&PBSE100, NIFTY100.

For our purpose of analysis, we compared the performance of these funds, against their respective benchmark. 

Categories	Definition	Number of Mutual Funds	Benchmark
Large Cap	Large cap alludes to an organization with a market capitalization estimation of more than 20,000 crores. Large Cap Fund, typically invests in large Cap Companies.	29	NIFTY 50, S&P BSE 100 & NIFTY 100
Large and Mid-Cap	Funds which diversify investments in between large and mid-capitalization companies	23	NIFTY Large Midcap 250, S&P BSE 250 & NIFTY 200.
Multi Cap	These are expanded Mutual Funds which can invest into stocks across market capitalization.	32	NIFTY 500, NIFTY 200, S&P BSE ALL CAP & S&P BSE 500
Mid Cap	Organization with a market capitalization above Rs.5000 crore and under Rs.20000 crore.	23	NIFTY MIDCAP 100, S&P BSE MIDCAP & NIFTY MIDCAP 150
Small Cap	Company below market capitalization of Rs.5000 crores.	20	NIFTY SMALL CAP 100, S&P BSE 250 & NIFTY SMALL CAP 250

INTERPRETATION:

Based on the performance data as sourced from AMFI, the results have alluded to the fact that the Mutual Funds have outperformed their respective benchmark index, across the time period of 1 year, 3 years, 5 years and since inception.

For the 1year period, 81.4% of funds have outperformed the benchmark index. The highest is in the Mid and Small Cap Funds, where 85% have outperformed the index. The lowest has been in the Large, Large and Mid and Multi-Cap Funds.

For 3 year period, funds have outpaced the benchmark index by 64.14%. The maximum is in the Small Cap. The minimum has been in the Large, Large and Mid, Multi and Mid Cap Funds.

For 5 year period, 60.56% of funds have outperformed the benchmark index. The highest is in the Small Cap Funds. The lowest has been in the Large, Large and Mid, Multi and Mid Cap Funds.

Since its inception, funds have outpaced the benchmark index by 81.8%. The maximum is in the Multi and Small Cap Funds. The minimum is in the Large, Large and Mid and Mid Cap Funds.

CONCLUSIONS:

We conclude that in India the performance of Mutual funds is still better, the popularity of the ETF is yet to catch-up. As the possibility of generating ALPHA’s are much higher in the Indian market. ETFs will no longer be a niche market in India. The salient features of ETFs attract the investors which in turn results from the increase in the ETF market.

REFERENCE:

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2.      Economic times

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     20. Blackrock