Why are active fund struggling to beat the Nifty and Sensex in the last few years?

Globally, the active funds have always struggled to beat indices and that trend has been catching on in India also. According to the latest report by S&P Indices Versus Active Funds (SPIVA) for calendar 2021, more than 50% of the large-cap equity schemes in India underperformed S&P BSE 100 index. However, if a longer five year period of holding was considered then 82% of large-cap schemes underperformed the S&P BSE 100 index.

This is approximately true of ELSS schemes also wherein 27% of the plans underperformed over 1 year and 79% of the plans underperformed over 5 year period. The performance was slightly better in the case of mid and small sized schemes. In this case, the under-performance was 50% over a period of 1 year and approximately 58% underperformance over a period of 5 years calculated on CAGR. Both direct and regular plans are considered.

The good news is that the outperformance statistics for 2021 is slightly better than 2020, but that could also be because one was a volatile pandemic year and hence not strictly comparable on an apples to apples basis. However, the global head of index investment strategy at S&P Dow Jones Indices has highlighted that this only goes to show how difficult it is for large cap active funds to beat the index and for investors to select the leaders.

This has had an obviously fallout as has been seen in the US. For instance, as active manager outperformance has gone down, the number of converts to passive investing is on the rise. In India, the AUM of hybrid funds and passive funds put together account for 27.5% of the total AUM of the mutual fund industry. One reason could be that in last five years only a handful of stocks have done well and mutual funds have ceilings on a per stock basis.

However, financial advisors continue to give a very macro theory that ultimately the asset allocation or the choice of asset classes eventually impact portfolio returns. This may not be true in the short term but it is especially true over the long term. However, one way to overcome this is to adopt the systematic investment plan (SIP) approach, which automatically neutralizes a lot of the volatility with its phased approach.