Cover Story
Continued from p40
ETF Returns
to the benchmarks rise . The returns generated by the schemes often do not include dividends paid by the companies on the benchmark indices . Mutual fund schemes simply compare the returns generated by their schemes to the benchmarks , but do not include the dividends paid by the companies listed on the exchange . What this will do is pare the alpha generated by these mutual funds . And if the mutual fund houses are not able to deliver a significantly higher return , then the higher fees they charge will also come into question . So , if a large-cap diversified mutual fund is charging a fund fees or Total Expense Ratio of 2.5-3.5 per cent , then that will impact the returns by a similar number .
Has the mutual fund industry been over-stating alpha ?
Ask any fund manager at any leading fund house and they will claim that 65 per cent of funds in India generate alpha . But , the reality could be slightly different . While there is no doubt that active fund management has its own advantages , in the large-cap space the returns are not sufficiently high to justify a high expense ratio of 2.5-3.5 per cent , believe the industry experts . In the last ten years , mutual fund industry has generated an alpha of 4 per cent but this has come down to 1 per cent . This means that the performance of large-cap funds has been higher by 4 per cent in the last ten years but is now generating
ETF product |
1 Year |
3 Year |
5 Year |
10 Year |
NIFTYBEES |
17.38 % |
9.86 % |
14.39 % |
8.55 % |
That means , `10,000 invested before 1 year , 3 year , 5 year , and 10 |
years would have become `11,738 , `13,259 , `19,585 , and `22,714 |
respectively . |
Regulatory action will lead to shrinkage in alpha which the ( mutual fund ) industry has been generating so far .
Kapen Parekh President , DSP BlackRock
only about 1-2 per cent higher returns than the benchmark . With this kind of outperformance , it is hard to justify high fund charges .
Also , in India fund managers claim that alpha generation was high because of the loose definition of large-cap funds so far . In October this year , SEBI has defined the top 100 listed companies by market capitalisation as largecap stocks . So largecap diversified mutual fund schemes will no longer be able to invest in companies with a smaller market capitalisation . Kalpen Parekh , president of DSP BlackRock , believes this move will also impact the ability of fund managers to generate returns that are superior to benchmarks or passive funds like ETFs , which follow benchmarks . In fact , globally ETFs are now charging zero fees as they are managed using technologies like artificial intelligence .
In India , mutual funds have been showing returns based on absolute index performance , which excluded the dividend payouts . If one weeds out the returns after factoring in the dividends , then performance of large-cap mutual funds schemes would show lower returns . Returns that factor in total returns ( including dividend payouts ) are called TRI . Quantum Mutual Fund was the first to voluntarily move to benchmarking their schemes against the TRI and now even DSP BlackRock is doing the same . Parekh also believes that regulatory action will lead to shrinkage in alpha , which the activelymanaged funds have been generating so far .
According to HDFC Securities , one study shows that active large-cap equity mutual funds generated alpha of 4 per cent ( 2000- 2007 ) compared to TRI Nifty , but now this is down to 1 per cent ( 2008-2017 ). Some reasons for this shrinkage include increasing size of corpus ( leading to risk-averse behavior by fund managers ) and overlap in portfolios .
Going forward , beating the Index will become a
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Outlook Money December 2017 www . outlookmoney . com