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Calling For Caution

Checking out the top-performing funds' list in 2009 would serve no purpose, in fact, it should be a cause for suspicion

As the year draws to a close, investors’ and analysts’ attention naturally turns to how various funds and stocks have done during the year. Among equity funds, there are a clutch of funds that have done way better than the markets in general. Over a period when the major indices have returned around 70 per cent, about 250 out of 374 funds have returns that are greater than that. About 160 funds — half of the total have done substantially better, beating the markets by more than 10 percentage points during the year, and about a quarter have beaten the markets by more than 20 percentage points, with total returns of more than 90 per cent.

However, investors are invariably drawn to the very top-end of the performance tables, to the top ten or so funds. Just as in music, movies and so much else, they will be served up top ten lists of funds as well. Unfortunately, there is little information, and even fewer lessons, to be drawn from the handful of funds that are at the top of the list. As the equity fund universe has become larger, a membership of the top ten over any time period has become more and more dictated by chance. I must warn you, that if you are waiting for me to name these funds, then you should stop reading now; listing these funds would make a mockery of the very point I’m trying to put across.

The funds at the top of the year’s table have returns of about 120 to 140 per cent. However, that’s not a case for investing in them. Each one of these funds has a portfolio that, either by design, or by a fluke, is oddly concentrated either by sector, or in specific companies. The time to invest in these funds would have been a year ago, had you possessed the ability to peep into the future. Today, the only lesson that can be drawn is that over any given time period, equity funds logging top-performances are those that are specialised in some way, or those that prefer to run concentrated portfolios, whose concentration happens to match the market’s mood over that time period. Extreme outperformance is more a cause for suspicion than anything else.

What is encouraging is that over this year, funds have generally performed well, outpacing the benchmarks by a good margin. The average fund has outperformed by 9 per cent. On an asset-weighted basis, the outperformance is higher, which tells us that more popular funds have done better than the less popular ones. The total amount of money being managed by funds above the average is Rs 1.1 lakh crore, by those below — Rs 76,000 crore. This essentially means that aggregate gain to investors is substantially better than that suggested by the average performance of these funds.