Year 2005 brought much cheer to equity mutual funds. The least returns that a diversified equity fund delivered during the year were 23.32 per cent. But despite these eye-popping returns, diversified equity funds seem to have missed the bus when you compare their performances with their respective benchmarks.
Every fund strives to beat its benchmark, both in the bullish as well as bearish phases. The whole purpose of paying for the actively managed funds is that the fund manager is expected to do better than a ready basket of stocks that constitute a benchmark. Year 2005 has been disappointing in this respect. While in the preceding two years, 90 and 93 per cent of the diversified equity funds were able to beat their benchmark indices, this percentage dropped to only about 70.5 per cent during 2005.
On a closer look, one finds that it is the funds pegged upon BSE Sensex that have largely failed to match its returns. There are 30 funds that have this 30-stock index as its benchmark. But of these, only 12 funds were able to better the index. In fact, all of the five diversified equity funds missing out by the maximum margin follow the Sensex. LICMF Equity missed its benchmark by the maximum (19 per cent) in the category.
The reasons for this may not be hard to find. Among the major equity indices, Sensex has delivered the highest returns during 2005. With returns of 42.33 per cent, it is significantly ahead of the second best which happens to be BSE 100 index with returns of 38.35 per cent.
Perhaps the funds managers were too busy scouting for multi-baggers in the mid-cap space, hoping for an encore of years 2003 and 2004. But this year, things were a little different as the large-caps raced ahead, catching many of them on the wrong foot.