Why have so many Mutual funds underperformed??

You must be wondering how is it that so few of the schemes have made money, whereas the bulk of communication tells us that the BSE SENSEX as well as the NSE NIFTY have touched record numbers.

The cause for so many of the funds underperforming are many and varied but we are not looking to find how good or bad the fund managers have been. We are looking to find out how confusing the environment has been and how varied the performances have been.

If we look at the diversified world of Indices, and we are taking only a representative few, the difference is huge, even amongst this small sample. To keep the representation bias away I have taken only BSE numbers.

Obviously the Sensex has returned the most, in terms of growth. But do notice, as we grow the number of participants, the growth numbers fall. Thus, the index with the smallest representation of stocks has gained the most whereas the largest represented index has gained the least. And the difference is not small.

In fact the 14.38% of the Sensex growth is nearly double (7.75%) of the BSE 500 growth.

Next, let us examine the two indices that are capitalization based.

The picture conveys a very different picture from the one above. Whereas we had a series of positives above, the two cap based indices have been terrible. With both the indices returning significant negative returns and with a significant number of scrips within them, the overall decent picture turns dismal quite quickly.

And have the sectors performed well??

The disparity in performance is quite starkly visible in the accompanying graph. Of the 11 sectoral indices considered, there has been only 4 which has provided positive returns. And surprisingly it’s the realty segment which has given the best, 25% plus. Expectedly, banks, led by the private banks have done exceptionally well, followed by It and of course the Oil and Gas segment lead by Reliance. Realty index’s market cap is not significant, versus the others so its growth is largely marginally contributive to the overall markets. Because of the over representation of the Banks and IT and Oil and Gas in the diversified indices, the growth there has been good.

So to summarise:

  • The markets have been driven by few sectors and categories of scrips.
  • Overall markets have not improved much during the year apart from a few segments.
  • Overall sectoral performance has been significantly negative.
  • Mid caps and small caps continue to languish.

And the Call to action from the above is

Don’t worry about Sensex levels being at their all time highs. There are enough opportunities in the markets to cash in on.

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