How does your actively managed mutual fund perform?

Total net assets under management of mutual fund houses in india stand at 35.6 trillion, on June 30, 2022. At VND 12.86 trillion, equity-oriented contributing 36% of total assets under management. This substantial portion of assets is actively managed. Fund managers, perhaps with a superior skill set, are expected to outperform the benchmark portfolio as well index fund reproduce those standard portfolios.

Although investors seem to have confidence in the ability of fund managers, there is ample evidence that actively managed mutual funds perform worse than their benchmarks and managed counterparts. their passivity.

When an investor invests in an actively managed fund, the expectation is that the fund’s performance will outperform the benchmark fund’s performance. To pass the benchmark, the fund manager is required to deviate from the benchmark portfolio.

The fund manager is required to build and manage a portfolio that is slightly different from the standard portfolio in securities and weights, using his or her stock selection skills. Funds should be managed according to regulatory requirements.

For example, according to the October 2017 circular of the Securities and Exchange Commission of India (Sebi) on the classification and rationalization of mutual fund schemes, large cap funds are required to have a minimum of 80 % invested in equity and equity-related instruments of large-cap companies.

Large-cap companies are defined as the top 100 companies by full market capitalization. Fund managers need to comply with these requirements.


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Yale professors Cremers and Petajisto developed Active Share as a way to measure the level of active management. Active Share measures the difference between a fund’s portfolio and a benchmark index.

The active share range is from 0% to 100%. In the case of 0% active stocks, the fund is the same as the benchmark. Theoretically, an index fund is designed to have an active equity ratio of 0%. If the active weight is 100%, this means that the portfolio is completely different from the benchmark.

Conceptually, the higher the percentage of positive shares, the more “active” the manager is.

In general, funds with more than 50-60% active holdings are considered reasonably actively managed. Reducing the active weight, the fund is closer to the standard portfolio. Such funds are similar to index funds and may be referred to as “cabinet index funds”.

This table shows the active market share of the 20 large-cap funds for their top 10 holdings compared to the Nifty 100, as of August 30, 2022.

All of these funds use the Nifty 100 as a benchmark. As can be observed from this table, the top 10 holdings of the funds represent a significant portion of the fund’s investments.

In some cases, this number is as high as 74%. In the case of the Nifty 100, the top 10 holdings make up about 50% of the portfolio. The active market share based on the top 10 holdings ranges from 9.46% to 58.20%. Low-performance funds are closely following the benchmark for their top 10 holdings.

A high performance ratio does not guarantee performance, though, as the active ratio indicator is merely an addition to the toolkit for evaluating low-performing, actively-managed portfolios. certainly helps to identify closet index funds i.e. funds that claim to be active, but are, in fact, very similar to indexes.

Investors would be better off investing through low-cost index funds that are tied to the same benchmark rather than these active funds that revolve around a standard portfolio but come with expense ratios. higher.

For long-term investors, these options are important, as the cost savings are certain while the operational efficiency is not!

Dr. Rachana Baid is a professor – School of Securities Education, National Institute of Securities Markets (NISM). The views expressed here are personal.

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