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Mutual Funds

Sensex Five Year Returns Below 5%, Mutual Funds Did Slightly Better, But Barely Beat Inflation. Time For A Change?

What if you had invested in the Sensex, every month, with the same amount, over the last five years? (Called a Systematic Investment Plan or SIP)

Answer: Less than 5% Per Year.

(Add another 2% for dividends, and remove about 1% for costs – either as ETF fees or otherwise – and you still get just 6% to 7% on the Sensex for five years)

5 Year SIP return of the Sensex is below 5%

This is where you friendly advisor will tell you – Look, think 10 years, because five years isn’t long term.

If 10 year returns suck, the long term will become 20 years. Or till you retire. Or till you die. It’s a very good argument.

Active Funds Have Done Better: Mutual Funds Scrape Through

Contrary to popular notions in the US, in India active funds have done better. Let’s go back to 2010 and choose the top funds as of December 2010 (which were considered best performing then). These are funds you were expected to choose – I found an article (Forbes) that mapped the “best” of 2010. Let’s assume this would have been your investment source – and you selected the top funds there. I added one more – a fund called Quantum Long Term Equity – which has low costs.

Have they beaten the index? Assume that with dividends you would have made about 11% in 3 years (or 10 years) and 6% in the five year term (I’ve added one passive index ETF – the Nifty ETS fund)

Note – this is point to point returns, not SIP. (Have compared the ETF to it)

MF Performance (Source: Value Research Online)

As you can see – in the five year period all of the funds that were the top funds in 2010 have beaten the index (as measured by the Goldman Sachs Nifty ETS Fund, an ETF)

Note: Manoj Nagpal brings to my notice that Nifty ETS has given out dividends. If we added those, would things be different? They have given, in the past five years, between 1% and 1.5% as dividends so we could technically add that to get to 7%.

Also, all the above are point to point returns, none are SIP. SIP returns in these funds could be far superior!

However, Returns Continue To Suck

The best fund has given a five year return of 10.73%? Give me a break, please. (Don’t tell me to choose a fund which you know TODAY has been better performing – in 2010, there was no way of knowing which one will outperform. You only had past data)

Yes, the 10 year period has been good, with the ETF returning 11% and the other funds returning 13-16%. The outperfomance is not small – over a 10 year period the difference between Rs. Five Lakh invested at 11% or 13% is massive:

  • 500,000 invested at 11% becomes 14.20 lakh
  • 500,000 invested at 13% becomes 16.97 lakh.
  • The difference of Rs. 2.77 lakh is massive.

So 2% outperformance is not a small thing in the longer term.

Still, we consider the last 2005 to 2008 time frame an anomaly. They were really really good years; but if you consider the last five, things have been horrible. The five year returns of 6% to 10% are just about beating inflation, even if they did beat the index. This is not what you want when you take the much higher risk in equities.

(In fact, you would have gotten about 9% compounded gains through a liquid fund!)

Also, in dollar terms, India’s been a waste of time if you got those returns since 2010. The rupee has fallen from Rs. 45 to the dollar, to Rs. 66 in five years – and a fund manager that made 8% a year just about returned the same number of dollars after five years.

As much as I love investing, it’s getting obvious that the returns offered by indexing or mutual funds will probably be dissatisfactory. I’ve taken a more active route – direct investing, targeting absolute inflation adjusted returns. What would you do?

Please do comment. Would you:

  • Continue your SIPs in mutual funds assuming this is just a “bad time”? What’s the point at which you might want to diversify beyond mutual funds?
  • Keep money in other asset classes (real estate, gold) even though their five returns might be worse?
  • Reduce allocation to MFs and instead start looking at direct stock investments?

And of course, did the above data make you think about a change?

  • Kaushik says:

    Hi Deepak,
    Happy New Year.
    Long time we have not seen any article on real estate. Can you please have one with your observations ? I am hearing many conflicting news but obviously my view is very localised.
    Please let me know if you get time.

  • Mr. G. says:

    Interesting data. I would personally stick to a “modified” MF strategy – investing in MFs when PE and other market measures don’t become too hot to handle.
    Direct stock investing could perhaps work for you and others who are closer to the market, but I think it is very difficult & very risky for many. How many investors can claim consistently better returns than MFs? Chasing higher returns without additional risk is not easy at all!
    Gold is a no-no. Real-estate is more of “have enough, thank you”.

  • Vinay says:

    This article does no good to anyone except for the fact that you are showing off your knowledge. You better write encouraging articles to lead investors in the right direction.

  • Senthil says:

    I disagree. if you have invested same amount from
    1) 01-Jan-2011 to 01-dec-2015 in HDFC Prudence the CAGR is 15.34%
    2) 01-Jan-2011 to 01-dec-2015 in HDFC Top 200 the CAGR is 11.46%
    3) 01-Jan-2011 to 01-dec-2015 in HDFC Index Nifty the CAGR is 9.25%
    4) 01-Jan-2011 to 01-dec-2015 in HDFC Index Sensex the CAGR is 8.98%
    I created the above in a portfolios in a website like valueresearchonline and the above are the returns.

  • Shan says:

    True. Good article. And I fear there’s more pain to come. Funnily, equity investing by retail investors in MF seems to be at an all time high. Would you call this a bubble? I would.

  • rakesh ojha says:

    The reason returns suck is high valuations in last 10 years. PE ratio of sensex post 2005 has been 16-24. Prior to 2005, in the period 1994-2005, PE ratio was in the range of 10-15. So 15 year return look better than 10 year return, 20 year return look better than 15 year return and 25-35 year return looks even better at CAGR of 17-18%. But those days of lower valuations are behind. Future returns will be lower. India is the most expensive market in the world after China.
    Switching to individual equities will do no good for the same reason. Also, it is hard to beat the index.
    Gold, real estate are also in bear market.
    Switching to liquid funds also will give you 6-7% returns in low yield environment.
    You have no choice here.
    May be hide in liquid funds…let markets crash… let PE fall…then buy stocks at low valuation…but that point may be 1-2 years away.
    The world is in a prolonged bear market which is just getting started. probably will last 4-6 years. India cannot escape the consequences as we received $224 billion FII inflows in last two decades. Some amount will flow out during this world wide bear market. mean while our own economy is slowing.
    Note world wide PE’s here

  • lohit says:

    You should also post data on how much your active trading strategy has returned (net of short term capital gains taxes).

    • That is true – the number we have that’s documented on Cpaital Mind Premium is – two strategies, one of which has 44% CAGR, another of which has 300% in a year. Even if you take 50%, net of taxes is 35% per year in two years. My own personal account is up more than 25% per year post taxes in five years, and in a couple of those years I wasn’t trading very much.

  • pankaj says:

    Hi Deepak,
    Thanks for the article.
    Ofcos index funds have not performed well, but those would always perform worse compared to some reliable sector funds. Pharma/ FMCG/ Transportation Funds have been returning 20%+ since last 5+ years. People who do not want to spend time selecting stocks, can always invest in sectors they believe in.
    Real estate totally depends on timing & entry price, else it may not even beat bank FDs in long run + hassles. Gold, is something I am bullish on for long run, but as of now does not have much to cheer about.

  • Sumeet says:

    Hello Deepak,
    Wish you a very happy new year.
    Could you please elaborate bit more on what do you mean by “more active route – direct investing”?
    While I am not as knowledgeable as you nor have data to support it, I would believe that if we expand the period under consideration, we may see better returns. So depending on which slice of time we take (since inception to date) we would see a very different picture.
    To answer the question that you have raised, I invest in direct stocks and would continue to do so. In contrast to what you have asked, I have started investing in ELSS MF from this year from a tax saving perspective and shifted to it from PPF as an option thinking that I would get benefits of better returns (market linked). Now I am thinking that it may be wise to have both PPF and ELSS side by side with equal split to get best of both worlds 🙂
    Minor correction needed in the line which reads “Still, we consider the last 2005 to 2018 time frame an anomaly. They were really really good years; but if you consider the last five, things have been horrible.”

  • Kunal Damle says:

    I would continue with SIP’s more than anything else it is a good way to save money, and well honestly in the last 10 years I have made inflation beating return on the MF’s. That said I am going to be more active in my outlook now 🙂

  • Kinshuk says:

    Thanks Deepak. That’s a great article. Even I am confused right now seeing my stock portfolio vs my mutual fund returns, my direct equity has produced far better return than mutual fund portfolio. I was waiting for article like this 🙂
    I am not sure whether I will continue with SIP this year. I am taking these factors into consideration:
    1. Am I being greedy to see direct equity performing better than MF. Of course I am. This is kind of sin.
    2. Can I perform better than MFs when there is crash – this answer I don’t know as I entered the market in 2011. So, I have not seen a major crash. Loss of permanent capital will hamper my long term returns badly. So, confused due to this.
    Please let me know how can I take clear decision :).

  • Gagan says:

    Deepak – Probably try a hybrid whereby you invest 40% in top performing MFs, 30% active stock investing & rest 30% use for active trading in derivative strategies that can really boost your overall returns while markets move in a bearish phase (shorting nifty or buying puts when mkts are falling, the profits on nifty shorts would negate any loss being made in your MF or Equity cash holdings).
    What do you think?

  • Anonymous says:

    could you analyze with rolling 5-year returns. point-to-point of only one start and end point may not give the correct picture. One could always choose a 5 year time-frame, the results of which matches his liking.

  • alfalah12345 says:

    You better write encouraging articles to lead investors in the right direction.

  • Neeraj says:

    Hi Deepak,
    Your article does not seem completely unbiased.
    Hdfc equity fund has delivered 20% cagr since year 1995, its inception, does this not count for something?
    Any one can accumulate a boring stock like nalco everytime it goes down to 30-33 levels, just paying for its cash on book plus half the cost if its power plant, and be sure to make a 100% tax free capital gain plus dividendd whenever the commodity cycle recovers.
    Or, you could follow my strategy – be patient, wait for bad news in fundamentally sound stocks, then accumulate on declines, thereby increasing your margin of safety, while always buying in bits and never going all in at once, Case in point:
    Dr Reddy – declined 20% on fda issues, buy at 2900.
    DCB bank – declined 40% on branch expansionm buy at 75.
    HCL tech – declined 20% on poor guidance, buy at 820.
    Larsen – anyone could have detected weak momentum since July and waited to buy at 20 PE, that is now around the corner.
    Cadila – the latest one to see a sudden sharp decline due to fda issues, might begin a position here.
    I can go on and on…
    If the chennai floods had affected the operations of Eicher motors leading to a poor quarterly performance, that could have brought the stock down to 14000, then i would have begun a position in this stock.
    Anyway, once you have assessed the management, valuations, market status, you should place the topmost priority to the size of the opportunity, such as Nbfc, IT, pharma, casinos, travel, tourism, holidays, niche products, tiles, paints, plywood, et al.
    Also, patience is key, i have been waiting since september for Bosch to fall below 15000, and i believe that will happen, then i’ll enter and wait for 12000 to re-enter.
    Also, Nestle will fall below 5000 within a few months, then i may take a position.
    Patanjali might be a threat to this stock.

  • Kishan says:

    Awesomely misleading article. Found this article from 2010.
    Considering all the Tax Saving Funds in the article, following:
    SIP of Rs. 1000 per month from January 1, 2011 to January 1, 2016 would have given me minimum 12.63% annualised return (Sahara Tax Saver) to 19.80% annualised return (Franklin India Taxshield).

  • Sameer says:

    A timely article to prove a point proven over and over again, market is for long run.
    The same would have looked way better last March.
    Weak hearts should stick with FI only.

  • Manish Dhawan says:

    Interesting point you made in this blog. I think the solution lies in to have your cake and eat it too. something what Meb faber does in his portfolio where he mixes momentum with value.
    It is kind of running a trend following system on mutual funds. Idea is to have 02 asset classes. income fund and equity fund. whenever the signal of sell comes, you move your money to income funds and whenever a buy trigger comes, you load up on equity fund.
    The returns and the drawdowns would be substantially better as demonstrated in Faber’s white paper.

  • A 60% sensex + 40% VIX portfolio will always beant a 100% sensex portfolio.

  • Rajesh Rathod says:

    It’s a good article and does make sense but the data for MF is point to point, nor for SIP. Also, whatever instrument we invest in, we should monitor them. Equity based mutual funds are bound to come down after they go up; thus you should monitor and then switch investments which are in 20-25% gains, to debt or liquid funds. You have to work hard to gain money. Just starting a SIP won’t help. Either choose active funds which do this or you have to become active