List Of Top 10 Performing Mutual Funds To Invest In

Dear Investor Friends,

When it comes to mutual funds, worldwide, there is a raging debate between active and passive funds. The latter have been steadily gaining market share given their value proposition of low management fees.

Active v/s Passive Funds – the Indian context

What’s an Active Fund

As the name suggests, an actively managed fund is one in which a manager makes decisions about how to invest the fund's money.Managing an Active Fund involves active buying and selling of stocks with the objective of outperforming a chosen benchmark index. To achieve this, the mutual fund engages the services of portfolio managers and analysts. Such cost of managing an Active Fund is recovered from the mutual fund investors by way of a management fee (currently around 2% in India).

What’s a Passive Fund

In contrast to an Active Fund, a Passive Fund simply follows a market index. It does not have a manager. Thus, a Passive Fund will simply mimic a given benchmark and not make any active buy or sell decisions. For instance, a Nifty 50 Passive Fund will invest in the 50 stocks constituting the Nifty 50 assigning exactly the same weights as in the index. Increasingly, Passive Funds are structured as Exchange Traded Funds (ETFs) i.e. they trade on the exchanges like any other stock.

Active Funds have been in existence since 1770s. In contrast, the first passive index fund was launched only in 1976 by Vanguard Group of the US. Formed by the legendary (Late) John Bogle, Vanguard is today one of the world’s largest mutual funds, specializing in passive investing. Passive Funds are premised on the fact that, net of fees and commissions, Active Funds don’t earn returns significantly higher than the benchmark. So, Passive Funds intend to offer investors a low-cost exposure to the asset class in question, in this case, equities.

Active v/s Passive – the eternal debate

Even as both Active and Passive Funds defend their cause, data suggests that Passive Funds are clearly gaining acceptance vis-à-vis Active. Data compiled by investment research firm MorningStar suggests that in the US, share of equity Passive Funds has consistently risen from 25% in 2009 (approx US$ 0.8 trillion) to almost 48% in 2018 (approx US$ 3.4 trillion), see graph on next page.

Active v/s Passive – the India scenario

In India, Passive Funds have not made any significant inroads so far. In this context, we examined whether there’s a case for Passives to replicate the US success story here too. For this, we observed the performance of Active Funds for various rolling periods of 1 to 5 years over an 11-year period from 2009 to 2019. The findings are tabled below.

The percentage of outperforming Active Funds is healthy across time periods. Equally important to note is the percentage of outperforming funds increases significantly with the time horizon. Thus, over a 1- and 2-year period, about 70% of funds outperform. However, over a 5-year period, as high as 90% of funds outperform.

Going by the above data, there appears to be enough room in India for active investing. One likely reason for this is the fairly high level of non-institutional shareholding. The aggregate promoter holding in India is 50%. Of the balance free float of 50%, nearly a third is still held by individual investors. As institutional investors enjoy both informational and analytical edge over individual investors, the former are likely to outperform at the expense of the latter.

Implications for individual investors

•   Prefer to invest through mutual funds rather than directly.
•   Invest in mutual funds for the long term i.e. preferably at least for five years.
•   Choose fund managers with well-articulated philosophy backed by good long-term performance track record.

 

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Source Motilal Oswal BRST Insights