10 equity mutual funds that have outperformed over 1, 3 and 5 years

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Despite global and geopolitical challenges, Indian equity markets have reached new peaks, driven by healthy economic and earnings growth. The government’s focus on capital expenditure, ongoing reforms, supportive manufacturing policies, and private investments in emerging sectors (electronics, EV, energy transition) have bolstered the markets in recent years.

The Nifty 50 index has delivered annualised returns of 25.8%, 15.6%, and 16% over the past one, three, and five years, outperforming both the MSCI Emerging Markets and MSCI World indices. The MSCI Emerging Markets index delivered returns of 12.9%, -5.8%, and 10.3%, while the MSCI World Index posted 22.5%, 5.8%, and 10.3% during the same periods. These returns are based on closing values as of 8 July 2024.

However, the markets have experienced significant volatility due to the Covid-19 pandemic, supply chain disruptions, inflation, interest rates, unstable crude prices, valuation concerns, and economic growth worries of key trading partners. This volatility has affected equity diversified funds, with most underperforming their benchmark indices.
The data from ACE Equity database shows that over 70% of 111 equity diversified funds (78 funds) have underperformed their benchmarks in the past five years. This trend is also evident in one- and threeyear returns, with 53% of 163 funds underperforming over one year, and 65.7% of 134 funds underperforming over three years. Mostly small-cap funds underperformed in the one- and three-year periods, while largeand mid-cap funds underperformed over five years.

The analysis underscores the importance of regular performance evaluation, as all mutual funds don’t meet their objectives. Experts advise considering multiple factors while assessing a mutual fund’s quality, but historical performance is typically the first reference point.

10 funds that have outperformed over 1, 3 & 5 yrs

Investors strongly rely on historical performance and consider funds with the highest returns (in a specific time scale) as top performing funds. However, such fund listings are based on a single time scale. For example, a listing may show top-performing funds on the basis of three-year returns or five-year returns. A fund can be a top performer on a single time scale, but may be an underperformer in another time scale. Therefore, top-performing fund listings that are based on a single time scale may not represent true outperformers. An analysis based on multiple time scales may prove useful for investors who strongly rely on historical performance while selecting mutual funds.We have identified funds that have consistently outperformed their primary benchmarks and sub-category averages over one-year, three-year, and five-year periods. Out of 119 equity diversified funds older than five years, only 16 consistently outperformed their benchmarks and sub-category averages. Among these 16 funds, five are flexi cap, three are large & mid cap, five are large cap, two are mid cap, and one is a small cap. Value Research rates eight as 5-star funds and seven as 4-star funds, while one fund is unrated. The combined AUM of 16 funds was `2.42 lakh crore at the end of May 2024 and grew by 85% year-on-year. Comparatively, the combined AUM of 179 equity diversified funds grew by 52.6% y-o-y.The funds have also scored well on the risk-adjusted metrics. As many as 13 of the 16 funds have generated a Sharpe ratio higher than the average of all equity diversified funds in the past year. All 16 funds have generated a Sortino ratio higher than the average. In terms of Jensen Alpha or excess returns, 15 of the 16 funds have generated an alpha higher than the average. The numbers have been calculated for the past year between 8 July 2023 and 8 July 2024 using daily NAVs.

Looking at portfolio composition, HDFC Bank, Reliance Industries, ICICI Bank, Bharti Airtel and Infosys were among the stocks that were held by most of the selected funds in May 2024. Banks, automobiles, healthcare, IT and oil & gas were among the favoured sectors for most of the selected funds in terms of the value of shares held in the month of May.

The table lists the 10 largest funds out of the 16 shortlisted. The other six include Quant Large & Midcap, JM Flexicap, Baroda BNP Paribas Large cap, Edelweiss Flexi Cap, Invesco India Large cap and JM Large cap.