Do mutual funds outperform benchmarks?
It found that not a single mutual fund — not one — managed to beat its benchmark in either the U.S. stock or bond markets regularly and convincingly over the last five years.
Index funds seek market-average returns, while active mutual funds try to outperform the market. Active mutual funds typically have higher fees than index funds. Index fund performance is relatively predictable; active mutual fund performance tends to be less so.
Despite the high volatility, 78 out of 149 equity diversified funds have delivered returns higher than their benchmarks on a point-to-point basis. In other words, 52.4% of such funds have generated positive excess returns (fund return, minus the benchmark return).
Do mutual funds outperform the stock market? The study found that most actively managed mutual funds do worse than their benchmark index during most calendar years and over the long run.
A benchmark is an index against which a mutual fund's performance is measured. For example, the Nifty 50 is a benchmark against which many large-cap funds and index funds are measured.
While a majority of the mutual funds underperformed the S&P 500, some larger cap active mutual funds outperformed owing to their aggressive stock-picking strategies.
It found that over the course of one year, 51.08% of actively-managed mutual funds underperformed the S&P 500, and 48.92% of actively-managed funds outperformed the S&P 500. * However, those numbers change dramatically over longer periods of time.
| Focused funds | 10-year returns (%) | Benchmark index (%) |
|---|---|---|
| Quant Focused Fund | 19.03 | 15.38 |
| Nippon India Focused Equity Fund | 19.96 | 15.51 |
| SBI Focused Equity Fund | 17.92 | 15.51 |
| Franklin India Focused Equity Fund | 18.50 | 15.38 |
U.S. Equity Research is a Morningstar five-star gold-medal fund. It has no load and charges a low, 0.45% annual fee. Year to date, it's up 18.6%, versus the S&P 500's 15.5% gain. The fund beats the broad market and its Morningstar peers on a one-, three-, and five-year annualized basis.
Over the full period, just 2% of actively managed Large-Cap Core funds beat the S&P 500. Even in categories such as small- and mid-sized stocks, and growth — which benefited from the tailwinds of an outperforming universe — a minimum of 81% of actively managed funds underperformed the benchmark.
How often do mutual funds beat the market?
The long-term performance data show active management has a lot of catching up to do. Over the past 10 years, less than 7% of U.S. active equity funds have beaten the market, according to the Spiva U.S. scorecard .
Key Points. Most years, actively managed mutual funds underperform the benchmark S&P 500. Often, active managers are constrained by investment policies of the fund in question. Individual investors aren't constrained by such restrictions.
Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
A fund with 0 alpha means it is performing in line with the benchmark. Beta: The beta shows how volatile a fund is compared to the benchmark index. The baseline for Beta is 1 and funds with higher volatility have a beta higher than 1. While the same less than 1 implies less volatility compared to the benchmark index.
The key advantage of using the S&P 500 as a benchmark is the wide market breadth of the large-cap companies included in the index. The index can provide a broad view of the economic health of the U.S. because it covers so many companies in so many different sectors.
Investors often use the S&P 500 index as an equity performance benchmark since the S&P contains 500 of the largest U.S. publicly traded companies.
ETFs often generate fewer capital gains for investors than mutual funds. This is partly because so many of them are passively managed and don't change their holdings that often. However, ETFs also have a structural ability, called the in-kind creation/redemption mechanism, to minimize the capital gains they distribute.
Investing only in the S&P 500 does not provide the broad diversification that minimizes risk. Economic downturns and bear markets can still deliver large losses. The past performance of the S&P 500 is not a guarantee of future performance (yeap, and we'll get back to that!)
For the top 20 funds, the average 10-year annualized return was 20.83%. For comparison, the S&P 500's annualized return for the same decade was about 12.39%. For the full list of the top 20 mutual funds of 2013 to 2023, scroll through the cardshow below. (All data is from Morningstar Direct, and is current as of Oct.
Vanguard Total Stock Market ETF (VTI)
Historically, VTI has been competitive in terms of returns compared to the S&P 500 thanks to its similar top holdings and market-cap-weighted strategy. Over the trailing 10 years, VTI has returned an annualized 10.5%.
Do wealth managers outperform the market?
The studies have found that most actively managed mutual funds do worse than their benchmark index, both over the long run and in the vast majority of calendar years, in the United States and elsewhere around the globe.
Quant Focused Fund (19.03%) delivered the highest 10-year performance followed by Nippon India Focused Equity Fund which beat the benchmark index. The other schemes are the SBI Focused Equity Fund and Franklin India Focused Equity Fund.
Around 58% of the schemes failed to beat their respective benchmarks in the three-year horizon. The underperformance was more pronounced in the five-year horizon. Around 86% mid cap schemes underperformed against their benchmarks in five years.
The most common approach to benchmarking diversified portfolios is to compare a client's portfolio to a portfolio that consists of 60% stocks and 40% bonds. This is commonly referred to as the “60/40” portfolio. Typically the S&P 500 is used for the stock component and the Barclays Aggregate Bond Index for the bonds.
The benchmark will change based on which category of fund is selected. Be practical in terms of expectation, you cannot assume the fund manager to beat the stock market every month. The fund manager has a goal to beat the benchmark over a reasonable period of time.
Investors often turn to Warren Buffett looking for stock tips, and he has given the same advice for years: Periodically put money into an S&P 500 index fund. Some readers may be surprised by that recommendation given that Buffett runs Berkshire Hathaway, but he has never actually recommended Berkshire stock to anyone.
Although it is very difficult, the market can be beaten. Every year, some managers boast better numbers than the market indices. A small fraction even manages to do so over a longer period. Over the horizon of the last 20 years, less than 10% of U.S. actively managed funds have beaten the market.
Berkshire Hathaway has a solid track record of outperforming the S&P 500. Its market capitalization as of October 2023 was over $763 billion.
If you invest the amount i.e Rs 1000 per month for 20 years, you have deposited a total of Rs 2.4 lakh during the period. On the basis of the annual 15 per cent return in 20 years, you will get about 15 lakh 16 thousand rupees. If this return is 20 per cent annually, the total fund will be around 31.61 lakhs.
Ultimately, beating the S&P 500 is not the bottom line for a financial advisor's performance. There are other ways your financial advisor adds value beyond your portfolio.
How much was $10,000 invested in the S&P 500 in 2000?
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
If you are actually looking at equity funds to help you achieve your long term goals then you at least need to give yourself a holding period of 8-10 years. For debt funds, the outlook on rates should be your key driver for holding period.. Unlike equity funds, the debt funds do not really depend on long term holding.
It is generally recommended to exit a poorly performing mutual fund if it has consistently underperformed its benchmark over a sustained period of time, typically 1-2 years. Investors should also consider the reasons for the poor performance and evaluate if those issues are likely to persist in the future.
From 2010 through 2021, anywhere from 55 percent to 87 percent of actively managed funds that invest in S&P 500 stocks couldn't beat that benchmark in any given year. Compared with that, the results for 2022 were cause for celebration: About 51 percent of large-cap stock funds failed to beat the S&P 500.
Diversified management investment companies have assets that fall within the 75-5-10 rule. A 75-5-10 diversified management investment company will have 75% of its assets in other issuers and cash, no more than 5% of assets in any one company, and no more than 10% ownership of any company's outstanding voting stock.
Another reason why your mutual funds are falling could be because your investments are sector focused. This point is relevant to you only if you have invested in a sector fund. Sector funds invest only in a specific sector or industry. Even when the markets, in general, are doing well, certain sectors can suffer.
Advantages of Mutual Funds. There are several specific reasons investors turn to mutual funds instead of managing their own portfolio directly. The primary reasons why an individual may choose to buy mutual funds instead of individual stocks are diversification, convenience, and lower costs.
In conclusion, mutual fund investment in India is still a smart choice in 2023 due to several factors, including the expected growth of the Indian economy, the wide range of investment options available, professional management, regulatory oversight, and tax benefits.
Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.
Inflation is the biggest risk which eats up the returns generated by your investments in mutual funds. If your investments are not generating higher returns than the prevailing inflation rate, then you are just losing money from your investment.
Do fund managers beat the index?
What Are the Results? Generally, when you look at mutual fund performance over the long run, you can see a trend of actively-managed funds underperforming the S&P 500 index. A common statistic is that the S&P 500 outperforms 80% of mutual funds. While this statistic is true in some years, it's not always the case.
In this episode of Common Sense Investing, I'm going to tell you why most financial advisors are not recommending index funds. I think that there are four main reasons that financial advisors are not excited about recommending index funds. Commissions, career risk, their value proposition, and a lack of knowledge.
Commonly called the S&P 500, it's one of the most popular benchmarks of the overall U.S. stock market performance. Everybody tries to beat it, but few succeed.
Both mutual funds and ETFs hold portfolios of stocks and/or bonds and occasionally something more exotic, such as precious metals or commodities. Both can track indexes as well, however ETFs tend to be more cost effective and more liquid as they trade on exchanges like shares of stock.
“And they are incredibly cheap.” However, there are disadvantages of ETFs. They come with fees, can stray from the value of their underlying asset, and (like any investment) come with risks.
Diversification is an important factor, and you'll want to balance having too much in one type of asset. For example, many experts recommend having an allocation to large stocks such as those in an S&P 500 index fund as well as an allocation to medium- and small-cap stocks.