Large index funds continued to struggle in the first half of 2023, with 58% of large cap funds failing to outperform their underlying indices. The overall underperformance reached as high as 85.2%.

According to leading index provider S&P Dow Jones Indices, both domestic equity and bond mutual funds have experienced elevated underperformance rates over the past three- and five-year periods.

Most equity large-cap funds failed to beat their benchmarks, with 58% of actively managed funds underperforming on the S&P BSE 100 in the first half of 2023.

In the fixed income fund category, although the BSE India government bond index rose by 4.7% in the first six months, less than one-sixth of active bond fund managers managed to surpass the benchmark, resulting in an underperformance rate of 85.2%.

However, as tenure increased, the underperformance rates over three- and five-year periods decreased to 75% and 66.7% respectively.

According to Benedek Voros, the director of index investment strategy at S&P Dow Jones Indices, the Indian stock market experienced notable gains across various segments in the early months of 2023, measured in terms of rupee.

For instance, the BSE 400 mid-small cap index not only had higher total returns than the BSE 200, but also exceeded the S&P BSE 100 by more than 5%.

Despite the rise of 12.4% in the BSE 400 mid-small cap index during the period under review, 45.3% of active managers underperformed the index.

Among all fund categories in the India scorecard, equity mid- and small-cap funds had the best performance over a five-year period, with only 38.1% of funds underperforming the BSE 400 index.

In contrast, while the BSE India bond index rose by 4.6%, the underperformance rates of India composite bond fund managers were the highest across all categories at 95.7%.

Indian composite bond funds also had the lowest survival rates across all categories over one-, three-, and five-year horizons, with a fifth of the category’s funds closing or merging in the past five years.

The few funds that outperformed the indices in terms of absolute returns were the BSE 100 equity large-cap funds, which provided a year-to-date return of 58.06%.

These funds had returns of 83.33% for one year, 86.21% for three years, 92.86% for five years, and 61.24% for the 10-year period.

On the other hand, the BSE 200 ELSS achieved a return of 17.50% year-to-date, 34.21% for the first year, 56.10% for three years, 70.73% for five years, and 66.67% for the 10-year period.

The BSE 400 mid/small cap index returned 45.28% year-to-date (YTD), 78% for one year, 53.06% for three years, and 38.1% for five years.

As for the bond market, the composite BSE India bond index achieved returns of 95.65% YTD, 94.24% for one year, 65% for three years, and 99.30% for five years.

The BSE Indian government bond index provided returns of 85.19% YTD, 88% for one year, 75% for three years, and 66.67% for five years.

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