Top performers of one year rarely remain top performers in the next year. One must look for steady, average performers and funds houses that throw up a lot of good performers year after year

Mutual funds (MFs) are one of the popular financial products to earn returns on your investment that beat inflation. However, MF schemes vary in performance and it would be disastrous for you if you get stuck with a wrong scheme. Look at 2010 as an example, a year when the Sensex went up 17%. Equity schemes, on an average, fetched 14% returns. But averages can be deceptive. Out of the 213 equity growth schemes, 125 have outperformed their benchmarks; 88 schemes have underperformed; and 15 schemes have just about managed to equal their benchmark returns.

The top performing three schemes for 2010 are: Kotak Lifestyle, Religare Mid N Small Cap and HDFC Equity. Kotak Lifestyle Fund was up 27% while the other two fetched returns of 32% and 26%, respectively. Is there a pattern among the outperformers? None. The fact is the top performers of one year rarely remain top performers in the next year. Look at the table. Except one or two funds which managed to be among the top 10 in two years, none of the top 10 of earlier years found a place among the top 10 of the following years.

So, how should you interpret the data? Look for steady, average performers. Also look for fund houses that throw of a lot of good performers year after year.

For instance, among the outperformers of 2010 there are eight funds from HDFC Mutual Fund—Top 200, Premier Multi-Cap, Mid-Cap Opportunities, Long Term Equity, Growth, Equity, Core & Satellite, Capital Builder, with an average return of 24%.These funds have beaten their benchmark by 11%, on an average.

If HDFC was the best fund house, JM’s funds destroyed investors’ wealth. This is not a surprise. As we pointed out in our article in Moneylife (1 July 2010), JM is, indeed, the worst fund house by any parameter. Among the 20 worst-performing schemes over the past one year, JM has as many as eight. All these schemes have grossly underperformed their respective benchmarks and show an abject lack of professionalism. These include Basic (-16%), Agri & Infra (-15%), Small & Mid-Cap (-6%), Mid Cap (-6%), Hi Fi (-3%), Multi Strategy (2%), Emerging Leaders (3%) and Contra (4%). Only one out of the 10 equity schemes has managed to outperform its benchmark, namely, JM Large Cap Fund whose return barely equalled the benchmark return of 16%.


Among the 20 worst performing funds of 2010 are: Kotak Indo World Infrastructure Fund (4%), HSBC Progressive Themes Fund (2%), Bharti AXA Equity Fund  Eco (2%), Bharti AXA Equity Fund-Reg (1%), L&T Small Cap Fund (-5%), Sundaram Media & Entertainment Opportunities (-2%) and Reliance Equity Fund (-1%). Four Tata funds have also reported disappointing results. These include Service Industries Fund (6%), Equity Opportunities Fund (6%), Midcap Fund (9%) and Equity Management Fund (13%). The performance of Tata funds may be affected even further since the asset management company has lost its CEO, Ved Prakash Chaturvedi. One of the most shocking facts of the report card for MF schemes in 2010 is that two schemes of Reliance Mutual Fund have underperformed their benchmarks and that too grossly. These are Reliance Natural Resources Fund (4%) and Reliance Equity Fund (-1%). So, the lesson is: aim for modest returns, avoid fancy schemes and a few specific fund houses which perennially lose money. — Moneylife Digital Team