Illustration: Binay Sinha

The sharp, broad-based rally in the equity market in the financial year 2023-24 marked a reversal in fortunes for fund managers. Contrary to past trends, active largecap funds fared much better than midcap and smallcap funds when it came to outperforming the benchmarks.

During the year, active largecap funds delivered a 38 per cent return on average, vis-à-vis nearly a 35 per cent rise in the NSE Nifty 100 Total Return Index (TRI). Over two-thirds of the active schemes have delivered better returns than the index. Compared to their passive peers, index funds and exchange-traded funds (ETFs) that track the Nifty 50 and Sensex, the performance improves further with nearly 90 per cent of the schemes outperforming, shows data from Value Research.

According to experts, the outperformance is largely a result of active schemes’ significant exposure towards midcap and smallcap stocks, which have done better than largecaps in the FY24 rally. They also cite the broad-based recovery in the market and the underperformance of index heavyweights like HDFC Bank.

However, active largecap funds trailed the other largecap passive index—the Nifty Next 50. Passive schemes tracking these indices delivered over 60 per cent in FY24.

Mahavir Kaswa, Head of Research – Passive Funds, Motilal Oswal AMC, says the Nifty Next 50’s performance is in line with expectations. “During a market rally, smaller stocks tend to go up more than the bigger ones. At the end of last year, the Nifty Next 50’s performance had suffered due to stock-specific issues. The recovery this year also boosted its performance,” he said.

Adani group stocks had over a 10 per cent weight in the Nifty Next 50 in January 2023, when these companies were hit by the Hindenburg crisis. The rout in Adani group stocks had weighed on the Nifty Next 50’s performance.

The strong rally also aided the performance of factor-based indices. Schemes tracking the Nifty Alpha 50, Nifty200 Momentum 30, and the Nifty Alpha Low Volatility 30 outperformed most of the plain vanilla indices. The Nifty Alpha 50 and Nifty200 Momentum 30 delivered over 68 per cent.

According to analysts, their performance is also in line with expectations as momentum as a factor does well during the bull phase.

While active largecap funds delivered a positive surprise, the active smallcap and midcap funds faltered. The outperformance ratio dipped to 17 per cent and 14 per cent, respectively, even as their longer-term track record remained on the better side vis-à-vis active largecap funds.

The underperformance was a result of two major factors, experts say. In a recent study, PGIM India MF pointed out that the index-level performance was largely driven by low-quality and low-growth stocks, resulting in the underperformance of active funds as they invest in better-quality stocks.

In addition, the comparatively lower gains in the largecap allocation of smallcap and midcap funds also weighed on their performance.

First Published: Apr 01 2024 | 6:57 PM IST

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