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In India, Mutual Funds Have Beaten the Nifty (No Survivor Bias Edition)

In the west, it’s common to take ETFs and say that they have beaten managed funds by a wide margin because markets are efficient and fund managers eat too much and yada,yada,yada.

This is apparently not true in India, where fund managers seem to be able to easily beat the Nifty ETF.

So in India, it’s been better to buy mutual funds than to buy Index ETFs. And even more in the last one year.

Comparison Points

Let’s be honest first and say that:

a) Everything in India in terms of equity is compared to the Sensex or the Nifty. So don’t tell me to compare to the S&P 500 or something. The Nifty is good enough.

b) No survivor bias: It’s not fair to compare today’s top funds with the Nifty. Why don’t we just take funds that were the best around 10 years ago? I found a link by Rediff, which has the top funds in 2005. Let’s take the top few funds of that time, and see how they have done with respect to the Nifty.


The Nifty Raw index is not a good thing to compare with mutual funds, because it does not include the impact of dividends. Mutual funds invest in the underlying stocks so their NAV contains dividends, reinvested. Comparing with the NAV of the Nifty ETF wouldn’t make sense too, as these ETFs pay out dividends (so NAV falls, and we don’t want to compare a dividend paying NAV with a mutual fund’s growing NAV). We therefore use the Nifty Total Returns index which is released by the NSE and includes the impact of reinvesting dividends.

For mutual funds we use the “Growth” option NAV which is the same as reinvesting dividends.

Mutual fund data as of 14 Aug 2014. The multi year results are annualized growth rates. Data on mutual funds from

The Result

Here’s what we get:



  • Four of the top six were able to beat the Nifty (total returns) in 1 year, 3 year and 5 year returns.
  • Of the other two, only one has lagged in the five year returns, and even that has beaten in the 1 year timeframe. (A comeback?)
  • Only Franklin Bluechip looks like a laggard today.

We haven’t compared the rest of the lot, but taking the top 6 and getting such an incredible result is proof enough, we think.


There are good reasons for it:

  • Indian funds don’t charge too much in fees. It’s capped at 2.5% and even then, these funds charge lower.
  • After 2009, with entry loads gone, you would have seen just as much return. (In the US entry loads can be as high as 6% in managed funds)
  • Indian funds that buy stocks not in the Nifty 50 have done well, as those stocks have risen sharply. And most of these funds own more than just the Nifty 50 stocks.
  • After Jan 2013, we have “direct” funds which will add another 0.5% to 1% to your return, so that makes these funds even better vehicles.

Disclaimer: This is not an advertisement to go buy funds. I’m just debunking a myth. I was as surprised as many of you, honestly.

The Takeaway

Listen carefully. People will quote research papers to say that ETFs are better than funds. This might be true for a different market, but it’s definitely not been true for India, and definitely not in the last one year.

In India, Mutual Funds have (generally) done better than the Index.

Please feel free to prove me wrong. But don’t use things like risk adjusted returns (no one cares, it’s a choice between Nifty or a fund). Or “on average” (because on average expects to you to invest in funds that have always been crappy, which is like what are you smoking).

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  • ]{umar says:

    Do the returns include annual AMC fees ? If yes, this is indeed a spectacular result. Would very much like to see post fee return comparison versus the index.

  • lohit says:

    Sorry, but this is a really misleading article. And I think we have had this argument before .
    Listed below are the funds you chose. They are listed in ascending order of the ‘average market cap’ of their portfolio (Data from valueresearchonline).
    Funds – Average market cap, Return over what Nifty gave (5yr)
    1. Franklin Prima – 9k crore – 8%
    2. Birla SL Advantage – 25k – minus 0.5% (This manager should be let go).
    3. Franklin Prima plus – 35k – 3.5%
    4. HDFC Equity – 43k – 5.4%
    5. HDFC Top 200 – 75k – 2.7%
    6.Franklin Bluechip – 82k 1% .
    7. Franklin Nifty Index fund – Avg market cap = 135K crore
    Notice the correlation between market cap and the funds return over nifty returns.
    So one packs the fund with smaller faster growing companies and then claim that due to ones competence, the returns are better than the Nifty which has lumbering giants? Well done.
    Will you also say the short term income funds beat the liquid funds due to the fund managers.
    As for ‘risk adjusted returns’ and ‘no one cares’
    1. Many people do.
    2. The ‘risk’ always comes due. Most people learn this by buying at the top and selling at the bottom.

    • Here’s the thing Lohit – hardly any mf investor has time to care about these minutiae. Mutual funds is for those who can’t invest directly. So, it’s simply a vehicle that should be have very easy mechanisms – have you beaten the index or not? Have you consistently done so?
      You pay the fund manager to select stocks. He has to select them so that they beat the Nifty. If he does that on most occasions, over a 10 year period, then he’s good enough. This is of course the past, but you can’t measure the future. IF he chooses to have a 35K cr. average market cap, then so be it.
      So here’s the deal – average market cap doesn’t matter. I’m saying that if you chose the “top” funds in 2005, you would still have beaten the index now. (I chose an article from a random google search, which was printed then, so there is no survivorship bias) In fact, these funds are not the top today, but that doesn’t matter – as a comparison with the Nifty, funds are a better investment!
      That’s the only point being made here – that if you tell me, that in India it would have been better to invest in the Index rather than funds, then the answer is no.
      Risk adjusted returns: most investors I have met – more like 95%, and I’ve met a heck of a lot – don’t give a rats ass. Their funda is: I want to invest and make money. If I make more than the Nifty most of the time, I’m happy. I don’t disagree with them – if they had more time, they would be advisors or something.
      I personally think we should simplify these things for investors. Everything should be compared to Nifty Total Returns and nothing else (on the equity front).

      • lohit says:

        If you are saying, its easy for the average investor to beat the Nifty, then i agree. One just picks up any halfway decent mid-cap or ‘top 200’ funds with a track record.
        But if you are saying this is due to the fund managers competence, I disagree.
        Besides, remember that Nifty itself is a human decided composition. Someone somewhere said lets have a market cap weighted collection of stocks. One could just as easily have an trading volume weighted collection too and call that the market. The US takes it one step further. The S&P 500 composition is partly done manually. A committee determines it. So all this comparison with an ‘market’ benchmark is actually a comparison with a human determined benchmark.

        • Of course, but that doesn’t preclude skill or luck. I don’t care what we attribute it to, but I can say for a fact that the past shows us how sticking with indexes isn’t as worthwhile as going with the (top) funds.

  • Gurvinder chadha says:

    Most of the funds mentioned have portfolio 70% or so outside benchmark . Alpha is result of that rather then sticking to the scheme benchmark only stocks and only changing weight.

  • Px says:

    Select good MFs , thanks to change in the nations management and shift in the mkt cycle and the end of the congress upa govt .
    What about gold mf vs gold etf ?

  • Arjun says:

    Hi Deepak,
    Does SIP improve returns further?
    Also, would rolling returns over different Timeframes be a better measure? Lastly, would comparing returns with a broader index like CNX 500 be better since the MFs have diversified portfolios?

  • Neeran says:

    Good stuff, Deepak. The other comparison that needs to be done is real estate vs. MFs over the long term. Good quality data, especially on real estate, will be a challenge of course. But I keep getting castigated for not investing in real estate, and would love to throw some data back in people’s faces 🙂

  • DJ says:

    Wrong benchmark!
    Nifty Junior would be a better benchmark, although still better would be something like a top 500 mkt cap benchmark or an entire market benchmark. In the US they have lots of indices – Russell 2000/3000 for small caps, S&P 500 for large cap, etc. Unfortunately, we don’t have the same in the Indian market (I wonder if its because the MFs don’t want a fair comparison and lobby NSE to not introduce wider market indices).
    In any case, comparison with Nifty Junior would be far more appropriate.

    • There are wider indexes (BSE and NSE 500s) but the popular perception is still the Nifty. I don’t think Junior is appropriate – almost 0% of MF investors even know what the junior is.
      I would think the “appropriate” one (not considering peoples’ knowledge) is the CNX 500 in India. But let my biases not show. I’m now a big fan of simplicity; deal with what people accept. Nifty or Sensex, that’s what they know.

      • mukul says:

        Just because nifty flashes on tv all day, it doesn’t mean its the best index

        • DJ says:

          Actually, its not about the “best” index (or about what people are most familiar with) but about using the most appropriate one based on fund strategy.
          Ideally, a small cap MF would be compared to a small cap benchmark index, a mid cap MF to a mid cap index and so on. I guess many of the diversified funds probably shift their large/mid/small cap bias so they would probably need to be compared to CNX 500.
          I think if we had an ETF for CNX 500, it would be much better as it would come up in the radar of MF investors more prominently, doing away with Deepak’s point that investors don’t know about these indices. I still don’t understand why we don’t have more products in the ETF space.

        • Hey, someone said we have an ETF for the CNX 500. I think if the index did go prominent we could compare. We could then get data for “total” returns in those indexes as well (currently only available on the Nifty)
          I agree, we lack depth in ETFs. Forget indexes, I’d like a bond ETF, beyond the liquid bees 🙂

      • DJ says:

        The comments here prove otherwise. People are ready to accept more and they know a lot more than Nifty or Sensex (and your audience is better than the average MF investor too). Its not that complicated. Its all your fault. Who told you to go about educating investors? Now you can’t turn back the clock and claim simplicity. Bah…

        • Touche 🙂
          Have been realizing recently that there is an educated investor and then there’s the guy that really needs the help – the guy who only understands Sensex and Nifty 🙂

        • DJ says:

          Hmm.. I guess its a common problem with scale (how to cater to different audience segments). So, maybe its a good sign! Big media takes the easy route and ends up catering to and confirming the biases of the lowest denominator. I guess as long as one doesn’t stoop that low, one can still be educational, disruptive and helpful.
          And, I realized that CNX 500 ETF seems to have performed worse than Nifty in the last 3y/5y periods (I hope dividends were included in what I was looking at), so it might not have mattered anyway…..

        • It’s strange but I think at this point what we want is participation. The less friction there is, the more people will get in. So use one benchmark for all equity, and use reasonably large time frames (1 year is too short, 10yr can’t be the only factor, so multiple year return stuff)
          I think the CNX 500 ETF would have to be adjusted for dividends, but rapid inflows and outflows can hurt it. Especially if it’s a small fund by AUM…
          I agree with you that there’s a need for the “smarter” investor. I know also that I’ve been writing about that. But I like simplicity in thought and in this case, I’d like to compare it with the benchmark just to prove that point that benchmark ETFs in India might not be better.

  • mukul says:

    I think most mutual funds go out of top 50 companies so you can compare them to nifty, these are returns of juniorbees and this beats more of your funds. The fees that indian mf industry charges are still very high even compared to the best mutual funds in the world. On an average mf return cannot be better then index, that doesn’t mean all mfs are good but on avg you are just better off in junior bees
    Returns(%) # Rank
    1 mth 1.8 54
    3 mths 13.0 3
    6 mths 37.7 3
    1 year 49.7 2
    2 year 60.0 1
    3 year 60.7 1
    5 year 103.2 1
    # Moneycontrol Rank within 80 Equity Index

    • “average” is misleading. Take the top funds of a previous year and see if they have continued to beat the index. That’s a valid strategy no?
      Hardly any one has even heard of Junior as an index, so there is no point comparing with Junior mate. People compare what they see, and this junior stuff is just confusing to them. Oh, and sorry, but those are absolute returns you mention (not annualized). Annualized, they don’t beat the funds AFAIK?

  • Tejaswi says:

    But the idea is to not beat the market. The idea is to take part in the market. IDFC Nifty MF, or HDFC Nifty MF have expense ratios of 0.2% (direct plan). I am happy to use these for my large cap portfolio and grow with the market. 16% year on year compound growth. I will take it!!
    Of course, will have to go with actively managed funds for the small and mid cap funds.

    • I suppose that’s fine too, however is there a reason you’d like to not beat the market when these funds have consistently done so?

      • Tejaswi says:

        I am tempted by the 50% returns as well. But I think there is a place for these cheap index funds in one’s portfolio. The reasons that allow fund managers out perform the index will keep shrinking over time. In the last 20 years, Indian markets were “not mature enough” for index funds to hold their own compared to their actively managed rivals. But as corporate governance tightens, information is more easily available, and other “progress” happen, fund manager’s current edge might become a future risk.
        As I said before, I am happy having both in my portfolio. Core and satellite approach, as they say.

  • Amit says:

    Errors –
    1. Uses only one period data to conclude that MFs beat Nifty – Would the conclusion hold if the same analysis is done for all the yearly top-performing MFs from the 90s onwards? Research papers that say low-cost index investing is better than MFs do not rely on just one-period data.
    2. Indian mutual fund fees are actually much higher compared to global averages. Even the likes of HDFC Equity end up charging 1.50-2.00% as expenses. Large US funds rarely charge above 1%. So Indian fund managers essentially eat much more than their US counterparts.
    At the most you should conclude that the best performing funds as of 2005 delivered better than Nifty returns in the 2005 to 2014 period. To say that in India mutual funds do better than index based on one data point is as good as saying a coin always lands on heads based on data of one toss.

    • 1. This is a darn good point. I think we should do it on rolling 1 year periods, rolling 3 year periods etc. all the way from 2004? I can do that. I have done this at many points in the past and it’s held up so I think it’ll be true for more periods than otherwise!
      2. Interesting point – didn’t know that. I thought they had much larger fees!
      Either ways, if we determine that in the last 10 years these funds have beaten the Nifty more times (or “many more times”) in 1y, 3y, 5y returns then we should be able to say funds are better?

      • Amit says:

        Yes. We can say funds are better than nifty if a larger data set demonstrates a similar trend as the 2005 data.
        There has only been limited research on the persistence of fund performance in India. I found one here –
        It still has a fairly small time-period which limits reliance but the methodology seems robust. Ideally any sample set should cover equal periods of bull and bear markets. In a bull market MFs typically perform better than index and underperform in bear markets. Using only bull or bear market data would result in selection bias.

  • sk says:

    why are always “odd” year returns published and not the “even” ones, is there something odd about even numbers?

  • shinu says:

    Dear Deepak
    Nice and sweet for the deserving KISS principle its due.
    I am a mutual fund investor for almost a decade now and more than happy with the results. was happy to pay the fund managers between 1.25% – 2.5% as charges who were able to give me 4%-6% above its benchmark (Nifty for largecap, BSE Midcap index for midcap funds & Smallcap BSE index for smallcap funds) returns CONSISTANTLY. If these funds are in the top quartile performers 75% of the time I don’t bother.
    One report I would love to see is that across the 10yrs you took, how many years these funds did beat your benchmark and not just at the end of 10th year.

  • Gunadhor Okram says:

    It is enlightening for a new comer.

  • Ishwar says:

    I checked the ETFs offered by Goldman Sachs (junior bees, bank bees, psu bank bees, etc) and most of these also beat the nifty total return index over the time-frame. So what exactly does the article prove ?