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Certain rules have no basis in reality. Fund managers have proved that

Do mutual funds stick to their benchmarks? Ostensibly, no. The only reason they seem to benchmark their funds against an index is because the rulebook says they must do it.

This view is bolstered by data which shows that most funds do not really allow their funds’ allocations to be dictated to in any manner by any benchmarking standards.

The reason behind that would be that since these funds are actively managed by fund managers they cannot very well sit back. They have to manage the fund towards the best possible result. The point that has to be looked at is that these are actively managed funds and they would be expected to look for opportunities as and when they became available.

Else, investors always have the choice of going for pure index-based ‘inactive’ funds.
Benchmarking, if adhered to in its full meaning, could be counterproductive. After all, there are many funds whose mandate by its very nature would require a huge divergence from the benchmark.

We have collected here 20 funds that have deviated the most from their benchmarks, BSE 100 and S&P CNX Nifty, and looked their final returns’ generating capacity.

Take for instance AIG Infra & Eco Reform. It is an infrastructure fund which has to lean more towards that sector’s various themes. For instance, this fund has an exposure to the construction sector of about 12.05 per cent of its corpus. Its investment in energy sector is 7.49 per cent, while in engineering it is 21.62 per cent and services it is 18.02 per cent. This kind of a sectoral allocation makes sense for the fund. On the other hand, the component of BSE 100, against which the fund has been benchmarked, has a share in construction of 4.27 per cent, energy 23.21 per cent, in engineering it is 4.44 per cent, services it is 2.21 per cent. The same is the case with UTI Infrastructure fund to a lesser degree. (check table 1)

Magnum Global has an exposure to chemicals stocks of 9.09 per cent, in construction it is 11.57 per cent, energy it is 1.26 per cent and services it is 11.52 per cent; on the other hand, the BSE 100 sectoral component is 0.98 per cent, 4.27 per cent, 23.21 per cent and 2.21 per cent respectively. The discrepancy is eye-opening. These were the funds with BSE 100 benchmarks.

On the S&P CNX Nifty, the anomaly can be looked from another point of view: while the index component of the auto sector indicates an exposure of 3.40 per cent, in actuality the funds that have deviated the most from following the benchmark shows that out of 10 only three have exposure to auto stocks while the rest 7 have none. In fact, out of these three, one fund, ICICI Pru Services Ltd has a mere 0.51 per cent exposure.

Another case is that of the chemicals stocks. While the S&P CNX Nifty shows zero exposure to this sector’s stocks, yet among these 10 funds, as many as 7 funds have exposure to it, the biggest holdings being with Escorts Leading Sectors fund, of 9.33 per cent.

Also, while the index’ component of energy sector is 35.20 per cent, the only fund that is anywhere near that is Sahara Power & Natural Resources at 33.95 per cent, while at the other extreme is Birla Sun Life India GenNext with just a 2.02 per cent holding.

Having said that, the ultimate decider of a fund’s performance is the gain that it generated. Investors don’t really care what the fund manager is doing as long as he keeps generating outstanding profits.AIG Infra, for instance, has delivered a 47.97 per cent return on a 6-month basis, while the same on a  1 year basis is 4.76 per cent. UTI Infra does well in the 6-month period with returns of almost 40 per cent, yet its yearly returns fall to -0.62 per cent (check table 2).

Magnum Global has generated a magnificent return of 61.80 per cent over a 6-month period, yet its performance over a 1-year period falls off into negative territory at -5.35 per cent, while its 5-year return is still a very respectable 30.43 per cent.

On the S&P CNX Nifty, we find that Birla Sun Life India GenNext has delivered a 6-month return of 29.75 per cent, while its 1-year returns are 3.80 per cent and 3-year returns are at 10.92 per cent (it is not yet 5 years old).

ICICI Pru Services Industries has delivered a 6-month return of 38.80 per cent, but its 1-year return falls to -11.16 per cent.
Sahara Power and Natural Resources has generated a 6-month return of 60.21 per cent, but its 1-year return is just 7.62 per cent.

Should this mean an end to benchmarking? Keep watching this space.

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