A majority of equity funds underperformed their benchmark indices over a five-year period. About 64 per cent of large-cap equity funds underperformed the S&P CNX Nifty index over the five-year period ended June 2010, a study by Standard & Poor (S&P) and Crisil revealed. Majority of hybrid and debt funds, however, outperformed their respective benchmarks.

According to the study – S&P and Crisil Index Versus Active Funds Scorecard – almost two-thirds of the equity-oriented funds across both large-cap and equity-linked saving scheme (ELSS) categories underperformed the benchmark index over a five-year period, whereas a majority of diversified funds outperformed.

Over a shorter duration (one year and three years), the recent recovery in the equity market translated to a large proportion of equity-oriented funds outperforming their respective benchmark indices.

Equity funds have relatively low survivorship (retention), except the ELSS category, as it has a mandatory three-year lock-in for the investor due to its inherent status as a tax saving instrument.

Over a five-year period, almost 60 per cent of the funds outperformed their benchmark indices in the hybrid categories (equity and debt-oriented). This rose to around 75 per cent in the case of equity-oriented hybrids and 65 per cent in the case of debt-oriented hybrids over a one-year time frame. The superior fund performance was also supplemented with a high survivorship rate. Both hybrid categories had survivorship rates in excess of 90 per cent across time frames.

The study also revealed that asset-weighted returns have been higher than equal-weighted returns acr­oss categories, except for gilt funds. Large-cap and diversified funds exhibited the least survivorship rate out of all fund categories studied.

Mukesh Agarwal, director – research, Crisil, said, “Asset-weighted returns continue to be superior to equal-weighted returns across most categories underlining the fact that larger funds delivered higher returns. This signifies that the size of the scheme is an important parameter while choosing schemes for investments.” The result is most notable in hybrid categories.

Tarun Bhatia, director – capital markets, Crisil, said, “During 2003 to 2007, the Indian mutual fund industry saw a surge of new fund offers, as fund houses capitalised on the buoyant equity market. However, the market meltdown of 2008 led to funds consolidating, leading to low survivorship rates in the equity category.”

On the fixed income fro­nt, gilt funds underperfor­med the Crisil Gilt Index ac­ross all time frames. Seventy one per cent of the gilt funds trailed the benchmark indices in the last one year. On the other hand, long-term debt funds surpassed the Crisil benchmark across the three and five-year periods. Both categories also enjoyed very high survivorship rates.