Investors of actively managed funds lost an opportunity of getting additional Rs. 36000 Crs in last five years

Time and again Warren Buffett talk about advantages of passive funds i.e. Index Funds and ETFs. Recently, in an interview he mentioned – “That I won’t do. I won’t do that in United States and I won’t do it elsewhere”. when asked about investing in Indian Actively Managed Funds.

Post that, there were many articles in favour of that and also against that.

In this article we tried to evaluate why Warren Buffett advice investors to stick to low cost passive funds.

For our analysis, we have considered 128 Actively Managed Open Ended mutual fund schemes which are at-least 5 years old. We have considered Growth Options of Regular Plan available under each of these schemes. Out of these 128 funds, 23 are Large Cap, 67 are Multicap, 20 are Thematic, 9 are Value, 6 are Dividend Yield and 3 are Contra Funds as per the categorization available in offer documents of respective funds.

Further, instead of comparing these funds against their respective benchmark, these funds were compared with ICICI Prudential Nifty Next 50 Index Fund -Growth Option – Regular Plan.

ICICI Prudential Nifty Next 50 Index Funds is an index fund which tracks Nifty Next 50 Index. This index is sub-set of Nifty 100. i.e. Top 50 companies form part of Nifty 50 Index and as name suggest, next 50 companies form part of Nifty Next 50 Index.

Generally, investors assumes that India is still an inefficient market and it is easy to beat indices. Yes, India still is an inefficient market and managers are able to find price anomalies. But more often, alpha is generated by way of taking more risk. For examples, you may find around 20-30% allocation to midcaps in a fund which is categorized as large cap. There is no standard definition of market caps. Different managers consider different parameters while categorizing stocks under particular market cap. So it is is more of a standardisation anomalies and no only price anomalies.

Large cap form around 96% of Nifty Next 50 Index. So it is very much appropriate to compare it with these 128 actively managed funds.

At the end of March 2012, collective assets under these funds were Rs. 1.15 Lakh Crores.

If these assets were held under same funds up to end of March 2017 would have grown to Rs. 2.40 Lakh Crores i.e. at the CAGR of 16%.

If these assets were invested in Nifty Next 50 Index, would have grown to Rs. 2.76 Lakh Crores i.e. at the CAGR of 19% in last five years.

In aggregate investors could have generated Rs. 36 thousand crores more if they would have invested in Nifty Next 50 Index Fund. 

Summary and Detailed scheme wise calculation is as below.