Majority of equity mutual funds in the country have underperformed against their respective benchmark indices over the last five years, according to a report by S&P Dow Jones Indices and Crisil released on Thursday.
"The underperformance of actively managed funds in comparison to the benchmarks over the latest five-year period demonstrates once again the difficulty for fund managers to consistently outperform the benchmark," S&P Indices Director Simon Karaban said.
A benchmark is a standard against which the performance of mutual fund scheme can be measured.
The agency used the S&P Indices Versus Active Funds (SPIVA) scorecard to come to the conclusion.
The scorecard reveals a majority of large cap equity funds failed to beat the S&P CNX Nifty, the benchmark for large caps, with 53.33% underperforming their benchmark over the last five years, 57.14% over the last three years and 52.63% over the last year.
The percentage of actively managed equity funds underperforming the benchmark indices has seen a declining trend since December 2010. However, their number still exceeds those outperforming the indices, a Crisil statement said.
However, data from the diversified funds and equity linked saving schemes (ELSS) suggests percentage of funds outperforming the benchmark in both one-year and three-year period is stable as compared to five-year period, the statement said.
Active managers of equity-oriented hybrid funds have also fallen behind benchmarks over both the one-year and five-year time frames, it said.
In contrast, the majority of active managers of debt oriented hybrid funds or Monthly Income Plans (MIPs) outperformed the benchmark CRISIL MIP Blended Fund Index over the three and five-year time frames, it added.
In the one-year period ended June 2012, the majority of gilt and balanced funds underperformed, while the majority of debt, ELSS and diversified funds beat their benchmarks.
Jiju Vidyadharan, Director for funds and fixed income research at Crisil Research, said the MF industry in the country has been undergoing multiple changes given various regulatory announcements and the rather flat capital markets.
"Given the environment, the number of new launches has been low and mutual funds have been in a consolidation phase."
"Of the different fund categories, the survivorship has been the lowest when it comes to diversified equity funds across categories and time. Whereas balanced funds, hybrid funds, gilt funds and debt funds had a 100% survivorship in the one year period," he further said.
Continuing the trend observed in the previous editions of SPIVA, the latest scorecard maintains that asset-weighted returns are higher than equal-weighted returns across categories (except for gilt funds) over the 5-year timeframe.
Asset-weighted large cap equity funds have returned 5.86% over the past five years compared to 4.61% for their equal-weighted equivalents.
This indicates that funds with better performance over longer time frames had larger assets under management, the report added.