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Out of the hundreds of equity schemes available in the market, a large number have underperformed their benchmark indices. However, in these times of gloom and doom in the equity markets, there is a strong reason to cheer for some sections of mutual fund investors — specifically those who have invested in the top equity funds by asset size.

Even though over longer periods (3 years and 5 years) a number of equity funds have underperformed the benchmark indices, larger funds, where the bulk of investor’s money lies, have fared much better. A performance analysis of the key equity fund categories at the end of 2011 throws up important take-aways for the investors. For instance: While only one midcap fund from the largest 15 midcap funds has underperformed the CNX Midcap index over 3 years, close to 31 per cent of the funds in this category — accounting for about 10 per cent of the category assets — have underperformed the midcap index.

Midcap and smallcap funds

2011 was marked by equity market volatility which left best of the fund managers guessing what investment strategy they should adopt. However, despite a falling market last year, it has not been that bad for equity fund — especially the small/ mid cap equity funds. The midcap/ small cap equity funds delivered an average return of about negative (-) 25 per cent during the year 2011. In contrast the CNX Midcap and BSE Small Cap indices delivered returns of negative (-) 31 per cent and negative (-) 40 per cent respectively in 2011. Only 14.5 per cent of the mid/ smallcap equity funds underperformed the CNX Midcap index in 2011. The interesting point to note here is that the funds accounted for only 7 per cent of the assets of the midcap category. Not a single fund from the largest 15 midcap funds (in terms of assets) underperformed the CNX Midcap index last year.

Large cap funds

Compared to the mid/ smallcap equity funds, large cap funds fared more poorly in 2011 as over one-third of the large cap funds underperformed their benchmark indices.

According to the global mutual fund research firm, Morningstar, 45 out of the 110 largecap schemes (about 41 per cent) underperformed their benchmark indices over the last 5 year period. However, these 41 per cent funds accounted for only 15.6 per cent of the total asset size of the largecap category.

This indicates that even though a large number of equity funds have underperformed the benchmark indices, the large equity funds — which account for most part of investor’s money have not done that bad, or underperformed their indices over the past few years. This is an important point, as these are the fund’s where most money of investors lies, says Dhruva Chatterji, senior research analyst with Morningstar India.

Is a large fund better bet?

Until few years back, most fund houses regularly launched new schemes. These schemes became big because of a huge push by the fund houses and high commissions to the agents. However, now good funds are becoming big. Till now, the biggest schemes have done well. But an investor must be watchful as too big asset size can be problematic for an scheme, suggests Dhirendra Kumar, CEO, Value Research. The biggest scheme in India has an asset size of over Rs 11,000 crore. Investor should get worried when asset size crosses Rs 20,000 crore, Kumar adds.

While the data proves that bigger the fund size, better the performance of an scheme, the investors must not pay undue attention to the fund size and base their decision to invest on the parameter of asset size.

Before investing in a mutual fund scheme, check its parentage, history of existence and track record across schemes. This gives an indication of how robust its investment processes are. Consistency in performance in a fund and sticking to stated mandate is no less important here since a consistent fund is more likely going to help you achieve your wealth creation objectives, suggests Nimesh Shah, MD and CEO, ICICI Prudential Asset Management Company.

ritukant.ojha@expressindia.com