It is common for small investors to try their hand in different fund schemes to diversify risk. Some tend to choose index funds, tracking an important benchmark such as Nifty and Sensex, while others rely on active funds to try to beat the benchmark.
There is a perception that it is unfeasible for most active funds to outperform the benchmark indices.
Active funds are the ones which take active risk and own stocks different from those in the benchmark and also in a ratio different as compared to the benchmark. Since they actively try to beat the benchmark, they take active risk.
Union Mutual Fund carried out a study to find an answer to this. It concluded that barring large cap schemes, most other categories such as Flexicap, ELSS, midcap and small cap have managed to beat the benchmark index in majority of their schemes.
The study was presented from the perspective of investors. This means if an investor chooses a particular scheme, what are the chances that the scheme would outperform the benchmark index. For instance, when an investor invests in a midcap fund, and nearly 62 percent of mid cap schemes stay ahead of their benchmark with regards to their one-year return, this gives an indication of the probability of beating the benchmark when investor chooses any of those midcap schemes.
Similarly, when 45 percent of the large cap funds could beat the index in their three-year return, this means majority of these funds lagged behind the benchmark.
The returns are calculated on a daily rolling basis.
Percentage of schemes (Regular Plans) that could beat the TRI benchmark
| Daily rolling data | 1 Year | 3 Years | 5 Years |
| All Schemes | 52.85 | 57.49 | 62.24 |
| Largecap | 43.63 | 45.42 | 48.73 |
| Flexicap | 49.16 | 55.60 | 62.11 |
| ELSS | 53.60 | 57.74 | 63.68 |
| Large & Midcap | 51.28 | 50.82 | 56.41 |
| Midcap | 62.39 | 69.07 | 69.05 |
| Smallcap | 70.47 | 81.11 | 86.21 |
| Focused | 48.36 | 52.86 | 61.63 |
| Value | 50.36 | 59.04 | 68.39 |
(Source: Union Mutual Fund)
As we can see in the table above, the average percentage of schemes, which managed to beat the benchmark index ranged between 43 percent for large cap to 70 percent for small cap. This means a vast majority of small cap funds could beat the benchmark in one year.
Likewise, upon looking at the three-year return, nearly 45 percent of schemes in large cap were ahead of the benchmark index, while 81 percent of schemes in small cap funds fared better than their benchmark.
The corresponding figures for five-year return were 48.73 percent and 86.21 percent.
So, the study concludes that a majority of mutual fund schemes across the spectrum of market capitalisation were able to beat the benchmark index when their returns are calculated on a daily rolling basis.