Standard & Poor (standardandpoors.com) publishes on the website https://us.spindices.com/spiva/#/reports the performance of mutual funds in comparison with the S & P Index. This is called Spiva (Standard and Poor Index vs. Active Funds). They do this for many countries around the world. For India, as on 30 June 2018, this what their analysis says:
Large Cap Equity Funds: When compared with the S & P BSE 100 Index, 87.88 % of the large Cap mutual funds performed less than the S & P BSE 100 Index, when the period is taken as 1 year. For 2 years and 5 years, the percentage of under-performing mutual funds was 78.35 % and 48.08 % respectively.
ELSS Funds: When compared with the S & P BSE 200 Index, 83.72 % of the ELSS mutual funds performed less than the S & P BSE 200 Index, when the period is taken as 1 year. For 2 years and 5 years, the percentage of under-performing mutual funds was 61.54 % and 27.78 % respectively.
Mid/Small Cap Funds: When compared with the S & P BSE 400 Midsmall Cap Index, 62.22 % of the Mid/ Small Cap mutual funds performed less than the S & P BSE 400 Midsmall
Cap Index, when the period is taken as 1 year. For 2 years and 5 years, the percentage of under-performing mutual funds was 78.26 % and 53.03 % respectively.
Composite Bond Funds (i.e. Debt funds): When compared with the S & P BSE Composite Bond Index, 30 % of the Debt mutual funds performed less than the S & P BSE Composite Bond Index, when the period is taken as 1 year. For 2 years and 5 years, the percentage of under-performing mutual funds was 60.42 % and 68.70 % respectively.
What does the S & P analysis tell us?
The data and analysis of S & P tells us exactly what we have been pointing out in this Blog – that mutual fund investments are subject to market volatility and there is no guarantee of high returns. In fact going by the percentages above, far from a guarantee, there are more chances of making a loss than a gain. As shown in my article (Read Bull Run or Bear It is never safe to invest in mutual funds), we too found out that about 50 % of the mutual funds in India earn a rate of return of less than 8 %. We have explored this line of argument in other articles too, bringing you fresh data and insight, working independent of Standard and Poor. You can be confident that we are on the right track when it comes to understanding that the risks of investing in mutual funds are high. The volatility of returns on risky investment requires the investor to have the risk appetite to make such investments.
Risky investments are not for everybody. Just as betting and lottery tickets are not for everybody. One needs to have the speculative attitude and a speculative bent of mind.
Investing in risky investments is also not a fashion statement, like they make it seem in the advertising campaign Mutual Fund Sahi Hai. The advertising campaign conveys the impression that it is trendy and modern to invest in mutual funds. When it comes to investment protecting your hard earned money by choosing low risk investments cannot be portrayed as old-fashioned. On the contrary investing in low risk investments is a statement of wisdom and financial prudence.
Tell your customers the truth about mutual funds and their performance.
Sell Risks Not Returns
The data for this article has been sourced from Standard & Poor as given in the following website: https://us.spindices.com/spiva/#/reports