It's quite an irony that a fund house credited with having some of best-performing actively-managed funds in its stable is struggling with a passively managed index fund! Surprising as it may seem, but that is exactly the case with Reliance Mutual Fund. Its Reliance Index Nifty Fund, with one-year returns (as on December 12, 2006) of just 18.59 per cent, has been beaten all ends up by the Nifty which delivered 33.88 per cent during the same period.
While some of its actively managed equity funds, managing many thousand crore of rupees, stack at the top of the performance records, there seems to be little attention paid to this small index fund managing just over a crore.
A little more introspection reveals that it's the huge cash holding that has resulted in this under-performance. After its launch in February 2005, the fund's cash holdings have averaged over 23 per cent.
But we are hard-pressed to find an explanation for it, given the fact that it's not such a huge fund so that the deployment would have been difficult, and the asset size has not been volatile so that frequent inflows/outflows would have led to a cash-loaded portfolio.
By definition, index funds are passively managed, as the portfolio composition is identical to that of the index that is being tracked. Then logically, index funds should mirror the performance of the index, with a minor tracking error. But Reliance Index Nifty is not the lone fund to have faltered at that. LICMF Index Nifty also suffers from the same anomaly. It has returned 26.27 per cent in the last one year, far less than Nifty's 33.88 per cent.
But unlike Reliance Index Nifty, LICMF Index Nifty has indeed been plagued by sudden inflows and outflows. From Rs 38 crore, its asset size declined sharply to just over Rs 3 crore within a span of three months by the end of December 2005.
Then again in October 2006, there were huge inflows as the assets surged to Rs 219 crore from Rs 3.4 crore in the month before.
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