Index huggers

When 'actively managed' mutual funds bear a lot of similarity to a relevant index, they are called index huggers. In fact, these schemes carry so close a resemblance to the relevant index, that one might as well have purchased an index fund or index exchange traded fund (ETF) instead. While designated index funds or index ETFs are low-cost because they only promise to replicate the index, 'index huggers' can end up charging relatively higher fees because they are classified as actively managed funds.

We have analysed equity fund portfolios to understand which funds have a high degree of portfolio overlap with the relevant indices. It is difficult to know if this similarity is by default or by design.

Hugging the Nifty and Sensex
In the large-cap category, there are two active equity funds that seem to be hugging Nifty 50 quite a bit. The Rs 1203-crore JM Equity Fund has a 79.93% overlap with NSE Nifty50. Its official benchmark index is the BSE Sensex, with which it has a 63% overlap. Started in April 1995, the fund has been an underperformer in the last 1 year, with 13.35% gain versus category average of 20.67% (as on June 2, 2017). It's ranked 168th out of the 169 funds in the large-cap segment.

DHFL Pramerica Large Cap Fund also has a relatively high overlap with Nifty at 73.68%. Still small sized at Rs 265 crore, the 14-year-old fund is benchmarked against the Nifty50. For a fund with a high index overlap, the DHFL Pramerica Large Cap Fund has an expense ratio of 2.55%. In comparison, most Nifty-tracker funds and Nifty ETFs have expense ratios of between 0.20% and 1%.

There are 28 other active equity funds with a 50-60% portfolio overlap with the Nifty50. This list includes Invesco India Business Leaders Fund, Taurus Bonanza Fund, ICICI Pru Focused Bluechip Equity Fund, Franklin India Bluechip Fund, HDFC Top 200 Fund, Sundaram Select Focus Fund, Birla Sun Life Frontline Equity Fund, Kotak Classic Equity Regular Plan and Reliance Quant Plus Fund. However, as these funds still have nearly half their portfolios invested outside the index, they can be said to be quite actively managed.

There are 9 active funds that share a 50-60% portfolio overlap with the Sensex. Notable funds include HDFC Growth Fund, HDFC Large Cap Fund, SBI Magnum Equity Fund and Mirae Asset India Opportunities Fund. Three funds, namely, JM Equity Fund, DHFL Pramerica Large Cap Fund and Invesco India Business Leaders Fund have over 60% similarity with the Sensex.

Typically, in India, only large-cap funds feature significant overlaps with the Nifty or Sensex, while mid-cap funds invest materially outside of their benchmarks. This is because of the limited investible universe for large cap funds. Stocks with market cap exceeding $2.5 billion market cap are considered large cap in India, and this will mean only 120-130 odd stocks qualify. Many AMCs which run concentrated portfolios restrict their large cap universe to the top 50 largest stocks. In both cases, building any diversified large cap fund portfolio of 45-50 stocks could result in more choices from the index itself.

Talking to Value Research, Koel Ghosh, Head-Business Development, S&P Dow Jones Indices (S&P DJI) said, "It will progressively get difficult for active funds to consistently find out unique investment ideas. Studies show that active fund managers in developed markets are finding it difficult to beat indices consistently. While in India active fund managers are still a big draw, investors will look at cost effective ways to get similar returns."