HOW REAL WAS THE ALPHA GENERATED BY EQUITY FUNDS?
It is said that data does not lie over the long term. When you evaluate equity funds, one question is what time period to consider? Three years would be too short, and five years at the current juncture runs the risk of flattering fund managers on a COVID base. Hence, 10-year returns would be a much better benchmark here. Secondly, we will evaluate the performance of 4 categories of equity funds viz. Large Cap Funds, Large & Mid-Cap Funds, Mid-Cap Funds, and Small Cap funds. But how exactly will they be evaluated?
We shall evaluate these funds based on the 10-year Information Ratio. Without getting into the specifics, the Information Ratio measures how genuine was the excess returns generated by the fund managers (if any). It is one thing to beat the index by taking on more risk. That may look like a good strategy in the short run, but has its own set of risks in the longer run. Hence it is not a sustainable strategy. The Information Ratio will be considered for regular plans and direct plans to see where the bulk of the alpha is coming from. Let us start with the large cap funds.
LARGE CAP FUNDS – WHAT DOES INFORMATION RATIO TELL US?
The table below captures the top-10 large cap funds based on 10-year CAGR returns. The information ratio (IR) has been shown separately for Regular Plans and Direct Plans. There are 31 large-cap funds in India managing an AUM of ₹4,00,920 Crore. Of these, the top-10 ranked below manage an AUM of ₹3,14,418 Crore. (IR – Information Ratio)
| Large Cap Scheme Name |
Return (%) 10-Y Regular |
IR – 10 Year (Regular Plan) | IR – 10 Year (Direct Plan) | Daily AUM
(₹ Crore) |
| Nippon India Large Cap | 14.59 | 0.16 | 0.37 | 48,660.24 |
| ICICI Pru Large Cap Fund | 14.57 | 0.26 | 0.50 | 75,920.59 |
| Canara Robeco Large Cap | 13.91 | -0.05 | 0.37 | 17,315.69 |
| Mirae Asset Large Cap | 13.31 | -0.09 | 0.27 | 41,149.87 |
| HDFC Large Cap Fund | 13.17 | -0.05 | 0.09 | 40,012.48 |
| Invesco India Large Cap | 13.08 | -0.12 | 0.27 | 1,696.40 |
| Bandhan Large Cap Fund | 13.01 | -0.25 | 0.09 | 2,019.09 |
| Edelweiss Large Cap Fund | 12.96 | -0.23 | 0.22 | 1,409.74 |
| SBI Large Cap Fund | 12.70 | -0.36 | -0.09 | 54,957.40 |
| ABSL Large Cap Fund | 12.68 | -0.34 | -0.03 | 31,276.52 |
| Data Source: AMFI | ||||
There are some interesting findings that emerge from the above table. Out of the top-10 funds by 10-year CAGR returns, only the top-2 have a positive information ratio on regular plans. That means, only in 2 cases, the fund managers were able to outperform the indices with calibrated risk and also justify the Expense Ratio. The other 8 had negative Information Ratio based on regular plans. However, if the investor had opted for Direct Plans instead of Regular Plans, then 8 out of the top-10 had positive Information Ratio. Essentially, fund costs were a major reason for active large cap funds having negative Information Ratio. Let us now turn to the large & mid-cap funds.
LARGE & MID-CAP FUNDS – WHAT DOES INFORMATION RATIO TELL US?
The table below captures the top-10 large & mid-cap funds based on 10-year CAGR returns. The information ratio (IR) has been shown separately for Regular Plans and Direct Plans. There are 31 large & mid-cap funds in India managing an AUM of ₹2,91,166 Crore. Of these, the top-10 ranked below manage an AUM of ₹2,01,867 Crore. (IR – Information Ratio)
| Large & Mid-Cap Scheme Name |
Return (%) 10-Y Regular |
IR – 10 Year (Regular Plan) | IR – 10 Year (Direct Plan) | Daily AUM
(₹ Crore) |
| Mirae Asset Large & Midcap | 17.18 | 0.30 | 0.57 | 42,743.19 |
| Quant Large and Midcap | 16.29 | 0.05 | 0.16 | 3,544.71 |
| Bandhan Large & Midcap | 16.19 | 0.05 | 0.44 | 11,519.48 |
| Invesco India Large & Midcap | 16.16 | 0.02 | 0.33 | 9,052.81 |
| ICICI Pru Large & Midcap | 16.12 | -0.00 | 0.20 | 25,533.36 |
| Canara Robeco Large & Mid | 15.38 | -0.12 | 0.16 | 26,358.33 |
| DSP Large & Midcap | 15.37 | -0.15 | 0.12 | 16,421.52 |
| SBI Large & Midcap | 14.77 | -0.29 | -0.12 | 35,247.37 |
| HDFC Large and Midcap | 14.71 | -0.22 | -0.12 | 28,299.41 |
| LIC MF Large & Mid Cap | 14.66 | -0.27 | 0.03 | 3,146.81 |
| Data Source: AMFI | ||||
Here again there are some interesting findings emerging from the above table. Out of the top-10 funds by 10-year CAGR returns, the top-4 have a positive information ratio on regular plans. That means, in 4 cases, the fund managers were able to outperform the indices with calibrated risk and also justify the Expense Ratio. The other 6 had negative Information Ratio based on regular plans. However, if the investor had opted for Direct Plans instead of Regular Plans, then 8 out of the top-10 had positive Information Ratio. Essentially, fund costs were a key reason for active large & midcap funds having negative Information Ratio. In terms of IR, these funds have done better than large caps. Let us now turn to mid-cap funds.
MID-CAP FUNDS – WHAT DOES INFORMATION RATIO TELL US?
The table below captures the top-10 mid-cap funds based on 10-year CAGR returns. The information ratio (IR) has been shown separately for Regular Plans and Direct Plans. There are 30 mid-cap funds in India managing an AUM of ₹3,92,874 Crore. Of these, the top-10 ranked below manage an AUM of ₹2,60,721 Crore. (IR – Information Ratio)
| Mid-Cap Scheme Name |
Return (%) 10-Y Regular |
IR – 10 Year (Regular Plan) | IR – 10 Year (Direct Plan) | Daily AUM
(₹ Crore) |
| Invesco India Mid Cap Fund | 18.33 | 0.04 | 0.31 | 9,195.30 |
| Edelweiss Mid Cap Fund | 17.90 | -0.07 | 0.21 | 12,502.59 |
| HDFC Mid Cap Fund | 17.88 | -0.12 | 0.06 | 88,663.06 |
| Nippon India Mid Cap Fund | 17.85 | -0.10 | 0.08 | 41,072.63 |
| Motilal Oswal Midcap Fund | 17.57 | -0.06 | 0.08 | 37,568.51 |
| Quant Mid Cap Fund | 16.79 | -0.15 | -0.02 | 8,492.01 |
| HSBC Mid Cap Fund | 16.15 | -0.38 | -0.18 | 12,480.98 |
| Axis Midcap Fund | 16.07 | -0.33 | -0.13 | 32,114.88 |
| ICICI Prudential Midcap Fund | 15.65 | -0.46 | -0.27 | 6,899.65 |
| PGIM India Midcap Fund | 15.40 | -0.50 | -0.22 | 11,731.53 |
| Data Source: AMFI | ||||
What do we take away from the ranking of mid-cap funds? Out of the top-10 funds by 10-year CAGR returns, only 1 fund has a positive information ratio on regular plans. That means, in just 1 case, the fund managers were able to outperform the indices with calibrated risk and also justify the Expense Ratio. The other 9 had negative Information Ratio based on regular plans. However, if the investor had opted for Direct Plans instead of Regular Plans, then 5 out of the top-10 had positive Information Ratio, which is still quite low. In terms of IR, mid-cap funds have offered lower risk-adjusted performance.
SMALL CAP FUNDS – WHAT DOES INFORMATION RATIO TELL US?
The table below captures the top-10 small-cap funds based on 10-year CAGR returns. The information ratio (IR) has been shown separately for Regular Plans and Direct Plans. There are 30 small-cap funds in India managing an AUM of ₹3,50,118 Crore. Of these, the top-10 ranked below manage an AUM of ₹2,56,784 Crore. (IR – Information Ratio)
| Small-Cap Scheme Name |
Return (%) 10-Y Regular |
IR – 10 Year (Regular Plan) | IR – 10 Year (Direct Plan) | Daily AUM
(₹ Crore) |
| Nippon India Small Cap Fund | 20.33 | 0.84 | 1.04 | 68,315.96 |
| Quant Small Cap Fund | 19.56 | 0.27 | 0.33 | 30,255.39 |
| Axis Small Cap Fund | 18.30 | 0.21 | 0.36 | 26,657.21 |
| HDFC Small Cap Fund | 18.25 | 0.37 | 0.55 | 37,916.12 |
| HSBC Small Cap Fund | 18.25 | 0.38 | 0.55 | 16,493.86 |
| SBI Small Cap Fund | 18.07 | 0.22 | 0.36 | 36,466.24 |
| DSP Small Cap Fund | 16.34 | 0.08 | 0.21 | 16,632.47 |
| ICICI Pru Smallcap Fund | 15.63 | -0.05 | 0.08 | 8,571.01 |
| Franklin India Small Cap Fund | 15.58 | -0.06 | 0.10 | 13,691.73 |
| Union Small Cap Fund | 15.02 | -0.09 | 0.05 | 1,783.86 |
| Data Source: AMFI | ||||
What do we take away from the ranking of small cap funds? Out of the top-10 funds by 10- year CAGR returns, 7 funds had a positive information ratio on regular plans. That means, in 7 cases, the fund managers were able to outperform the indices with calibrated risk and also justify the Expense Ratio. The other 3 had negative Information Ratio based on regular plans. However, if the investor had opted for Direct Plans instead of Regular Plans, then all 10 schemes had positive Information Ratio, which is a very good performance. In terms of IR, small cap funds have been the top performers.
The only generic category of funds that has not struggled to perform has been the small cap funds where a majority of the top performers have also given positive information ratio. That is followed by large & mid-cap funds, large cap funds, and mid-cap funds in that order. This is rather contrary to popular perception that small funds are extremely risky. That is food for thought!