Many investors are getting worried about their low mutual fund return as they are prone to compare the returns of own fund directly with Nifty and Sensex. They do not recognize the fact that such comparisons are often getting misinformed and do not reveal any useful insight because you may be comparing apples with oranges. Every scheme has set own objectives and benchmark to measure its return. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have broad based defined market benchmarks representing different market cap segments and sectors. They also have sectoral indices representing different industry sectors. These benchmarks are more useful for fund managers who have been managing the respective mutual fund schemes. Every fund manager has task to beat the relevant benchmark to showcase their expertise and promote their schemes through the sales and marketing team of the AMCs. However, a savvy investor should understand that since she may be not investing her monies in purely Nifty and Sensex stocks, she is investing in that fund which has set own benchmark and could able to achieve her financial goal within time frame set, hence there is no relevancy with their own fund benchmark for her goal. Also she should not do over-analysis the portfolio of a mutual fund scheme to identify the relevant benchmark for the fund.  You should realize that your fund managers and invested mutual fund scheme do not know your financial goals, time horizon and risk profile.  It is your onus to set your own benchmark when evaluating the relative returns of your mutual fund scheme. Your set benchmark may be nothing to do with fund manager’s benchmark, which is defined through regulation. For every investor, the benchmark is different for each investor based on their respective risk profiles and goals.

Get-Set Returns for your Financial Goals

For instance if you need 10 percent returns to achieve your goal in say 20 years then it will become your ballpark benchmark and how smartly you over achieve this number without taking extra risk. You start investing Rs. 5,000 per month towards your child’s education. You have been advised that if you make 10% CAGR, in 20 years you will reach the target of approximately Rs. 50 lakh. Now suppose in a particular year, your mutual fund gives you a 21% return, but your friend mutual fund gives 34% return. This will definitely make you prone to think that your fund performed poorly compared to that your friend. But at the same moment, you would recognize that you are still on your path and have outperformed your own benchmarks. You have made better progress than expected. In the next year, if your fund gives a 5% return and your friend’s mutual fund gives a negative 10% return, you might be a bit relaxed and happy about the fact that at least your mutual funds performed better than him. But the next moment you will come back to your own financial life and feel that whatever the case, you have underperformed your target of 10% each year which could not be able achieve the target of Rs 50 lakh for your child’s education. In both cases, it will be about YOU and YOUR GOALS first and only then will you see it in perspective. If you don’t have any goals and targets, the only benchmark you have is comparison with others. Then you start looking at your friend’s return, the best funds in India and the average in the category in which you have started.

Re-categorization of mutual fund schemes

Since the mutual fund industry is going through its re-categorisation phase.  The fund houses are making changes to some of their schemes in line with the new categories of mutual funds mandated by SEBI. They are also merging some schemes to comply with the new guidelines which don’t allow a fund house to run similar schemes. A fund house can have only one scheme under each category. These changes in some big schemes have been a wakeup call for many investors. Many DIY investors are mostly unaware of the entire process.  Some investors just woke up to the entire mutual fund industry going through a revamp. It happened mainly because their favourite scheme changed its name or fundamental attributes. This is a situation where not one but most of the schemes are changing. Since SEBI has also mandated that each fund house can have ONLY one scheme in each category, so only one large-cap fund, only on tax-saving fund, and so on. You have to re-look at your existing allocation of the portfolio. Some schemes changed from multi cap to large-cap and another from mid to large-cap, we need to get out from one of them. Because your portfolio may have already held large cap fund, it may have overweight in specified category and may get unnecessary   carried high risk in one’s concentrated portfolio. We have an extra advice for DIY investors. Investors need to look at the entire portfolio, risk appetite and return expectation to make the switch decision. Standalone decisions might lead to unnecessary taxation and hassle. Hence, to get optimize the existing portfolio, we have already started the process to revamp of existing portfolio of our clients in align with their risk profile, time horizons and their financial goals in phased manner due to re-categorization of schemes mandated by SEBI

Different Times give different returns

With the Sensex currently at a lifetime high after hurtling past 35,800, large-cap equity funds have delivered a 10.89 per cent return in one year and 14.23 per cent CAGR in five years. Multi-cap funds gave a 10.30 per cent one-year return and 18.14 per cent CAGR for five years. Mid- and small-cap funds outperform five-year CAGRs of 23.91 and 30.50 per cent, respectively. If you look at the returns they are so good because the starting point for these computations is in 2013. Since we tend to invest based on our income levels, cash flows and financial goals, we do not have the luxury of timing it nicely to market lows.

If you go in flashback to the subprime crises in 2008, large-cap equity funds have averaged a 6.01 per cent CAGR till date, beating the Nifty 50. Multi-cap funds have delivered an average 7.89 per cent CAGR. Midcap funds managed a 9.52 per cent CAGR till date and small-cap equity funds got to double digits at a 10.95 per cent CAGR.

For another era, who invested in with lump sums in frothy market on 2000, the Nifty 50 has delivered a 10.33 per cent CAGR till date. Large-cap funds have earned 12.89 per cent; mid-cap funds, a healthy 16.3 per cent; and multi-cap funds, 14.53 per cent. But we must remember that these investors have had an extremely long 17-year period to bounce back from their initial losses. For the purpose of this analysis, we analysed the performance of all categories of equity funds from three previous occasions when the markets hit a new high before they came crashing down. So, given that all retail investors must give time their investment very carefully as time in the stock market matters more than timing the market..

Cut-down your expectations

The lesson from these statistics is that drop down your return expectations to adjust for your high starting point. Today, even if your goal is three or five years away, with a following of long-term capital gain tax at the rate of return 10% on all equities and equity-oriented mutual fund, you may be better off factoring a post- tax an 11 per cent CAGR from equity funds rather than a 15 or 20 per cent CAGR. If you are lucky and your funds deliver much more, you will have the flexibility to cash out early. That’s much better than falling short of your goal after assuming an unrealistically high return. If you are going to invest at a new high, be aware that your portfolio may or may not deliver  positive returns within one or three-year time frame. So it is wise to build a buffer for the fact that you might have to stretch your holding period by two or three years in the final set of your holding period to earn the expected return. The final lesson here is clearly that if your equity fund is outperforming its benchmark in a rising market and has a long-term record of delivering good returns; don’t switch it with a newbie fund just to kick up your portfolio returns. When investing at market highs, ignore one-year performance and keep your eyes trained on five- and 10-year rankings to select funds. How the fund contained losses in the previous bear phase may be more important for your choice than returns in the current rally.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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