Call it the Seven Year Itch, if you like. I was curious to see how equity schemes and hybrid schemes had performed since the peak of the 2007-08 bull run, seven years ago. In this post, I present some observations that I found interesting. Just to be clear: I’m not intending to pass judgment on any fund. My intention is to offer food for thought around investing in equity schemes and hybrid schemes. As I have stressed in earlier posts, there are compelling reasons to invest into some of these schemes but at the same time, it’s important to be aware of the risks.
Here, then, are my observations. The scheme data has been taken from Value Research and does not consider loads.
- A hypothetical investment in the NSE-50 Total Return Index on 8 Jan 2008 would have grown over these 7 years by 4.87% p.a. In contrast, a cumulative, 7 year deposit with State Bank of India would have given a return of 8.77% p.a., before taxes.
- There are, in all, 224 actively managed equity schemes today, that were in existence at that point as well.
- The returns across these 224 schemes have ranged from 23% p.a. to –10% p.a.
- 162 of these (i.e. 72%) have shown a lesser return than that of the bank deposit (before considering taxes).
- 80 of these (i.e. 36%) have shown a lesser return than that of the NSE-50.
- 8 of the top 10 schemes, and 9 of the bottom 10 schemes are sectoral/ thematic schemes.
- Amongst domestic, diversified equity funds, the returns have ranged from 16% p.a. to –4% p.a.
- Despite the upsurge in the markets in the last 1 year, 22 schemes have shown negative returns over the 7 year period. In fact, 19 of these 22 schemes gave returns in excess of 40% in the last 1 year.
- 17 of these 224 schemes are currently rated as 5 star funds by Value Research. The returns across these schemes have ranged from 15% p.a. to 3% p.a.
- There are 25 ‘balanced’ schemes today (Value Research category: hybrid-equity), that were in existence seven years ago.
- The returns across these schemes have ranged from 14% to –7% p.a.
- 14 of these schemes (i.e. 56%) have given a lesser return than that of the bank deposit (before considering taxes).
- There are 54 ‘MIP’ schemes today (Value Research categories: hybrid debt-oriented aggressive, and hybrid debt-oriented conservative), that were in existence seven years ago.
- The returns in these categories ranged from 12% to 2% p.a.
- 38 of these schemes (i.e. 70%) have given a lesser return than that of the bank deposit (before considering taxes).
- The scheme with the lowest returns happens to be currently rated as a 5 star fund in its category.
In part, these observations highlight the risks associated with investing in equity funds at the peak of the markets, something I talked about at length in an earlier post. In part, these make the case for diversification, something I spotlighted in another post. Some observations even highlight the limitations of Star Ratings, something I touched upon elsewhere. But there is no denying that the performance of a number of funds is questionable and if the answers are not convincing, there is no reason for investors in these schemes to continue holding those investments.
By my calculations, there seems to be in excess of Rs.32,000 crore invested in equity schemes that have given lesser returns than the NSE-50 over these 7 years. While it would unfair for me to draw any sweeping inferences, I hope those investments are there for the right reasons.
