Mutual funds are lovely financial instruments and there is no doubt in their effectiveness overall. But are they instruments which you can invest in and then completely forget about it? This blog looks at the past 10 year returns of all the Large cap mutual funds (having a track record of 10 years) and see if there are any inherent pitfalls in mutual funds investing.
First I am comparing the returns of 18 Large cap funds against the Nifty index fund of ICICI. Important to note that we are paying actively managed funds a fee to beat the index.
30% active funds did not beat the index – Pitfalls in Mutual funds
Shockingly, even after ignoring many funds (I picked only famous 18 funds), 5 of them did NOT beat the index. So the extra fee we are paying the active fund managers are not paying us back. In fact they hit our pockets.
Active MF is not fill it shut it investment
Just because we invested in a expert managed active mutual fund, it does NOT relieve us of the fact we have to monitor its performance. Actively managed Mutual funds not equal to “fill it shut it forget it” strategy.
Index investing is also a safe bet
Index funds are less costly and do a decent job than 30% of the funds. (Remember again, I chose famous mutual fund houses to start with. This data will be more skewed towards Index fund if I pick the entire universe of large cap funds)
So what if we did the same analysis for only 5 years? Be ready to be surprised 🙂
Only 3 out of 18 funds beat the index – Pitfalls in Mutual funds
Shockingly, even after ignoring many funds (I picked only famous 18 funds), only 3 of the 18 beat the index. And what are the chances we will pick 1 among those 3, among the 18 available funds (only 16% chance you will actually pick a winner)?
Active MF is not fill it shut it investment
For a shorter time frame, index large cap fund is beating 84% of the large cap funds (of the chosen population for the period Sept-2017 to Sept-2022).
Index investing can be a winning bet
Index funds are less costly and do a decent job than 84% of the funds during the period selected. (Remember again, I chose famous mutual fund houses to start with. This data will be more skewed towards Index fund if I pick the entire universe of large cap funds)
Finally, the past 10 years data of famous large cap mutual funds, tells us that Index investing is a safe and sometimes winning bet. An active large cap fund does not necessarily beat the index. If you do not want to monitor your mutual funds frequently, index investing is a safe bet.
And as a side note, you can read about how I choose my mutual funds in this blog.
Thanks Gopal for helping us with your insights.
I assume/believe that the gap will be very marginal if we stay invested for longer durations like 15 years and so on.
I am very happy you found it helpful, Siva. True, the longer we stay invested the better our chances of the Active mutual funds beating the index. Thank you for your comment.
Very lucidly said ! True, hope people get this insight when they embark on the investing journey .
Thanks a lot Indu 🙂
Top site ,.. amazaing post ! Just keep the work on !