Mumbai: Your mutual fund manager is not worth the salary he is being paid. Or so a study by ratings and research firm Standard & Poor’s and Crisil appears to suggest.

Going by the Indices Versus Active Funds Scorecard launched by S&P and Crisil on Thursday, 70% of the large-cap equity mutual funds (essentially funds which invest in large-cap stocks) underperformed the 50-share Nifty Index over the 5-year period to December 2009.

A mutual fund scheme is deemed to have done well if it beats the Nifty returns. this is one way of measuring the performance of fund managers.

Even tax-saving funds, where the money is locked for three years, fared no better. almost 80% of the equity-linked savings schemes (ELSS) failed to beat the benchmark over the one and three-year periods. over the five-year period, 65% of ELSS funds gave returns less then the benchmark.

Diversified equity funds fared slightly better, with 60% beating their benchmarks.

Deven Sharma, president of Standard & Poor’s, said, “Our aim is to give local investors and their advisors a clear, transparent picture of how actively managed funds are performing versus the market benchmark —- and an indication of whether the fees that active managers charge are justified by their returns.”

Clearly, the fund managers do not deserve the salaries being paid to them.

But then, haven’t mutual funds been claiming to have given exuberant returns and beaten the benchmark?

Crisil says the benchmarks are not appropriate considering
the stocks the funds invest in. “Many times, a fund is benchmarked to S&P Nifty or BSE Sensex and the funds’ benchmarks are not linked with respect to the objective of the fund,” said Tarun Bhatia, director – capital markets, Crisil Research.

In other words, mutual funds are actually gaming their benchmarks. A fund that invests in mid-cap stocks and has the Sensex or the Nifty as its benchmark is likely to do better than its benchmark. this is because over a longer term, mid-cap stocks are likely to do better than large-cap stocks, which constitute the Sensex and Nifty.

Asked how many funds did not have an appropriate benchmark, Bhatia said, “We felt that 56% of the funds had an appropriate benchmark.” this means almost half the funds use benchmarks that help them show outperformance.

“There is room for appropriate benchmarking,” Koel Ghosh, director, S&P Indices, said.

So what is the way out?

Well, invest in index funds, which invest your money in stocks that make up a benchmark index in the same proportion as their proportion in the index. this ensures that instead of trying to figure out which mutual fund scheme will be the best performer in a particular year, you at least get the market rate of return.

Funds toying with benchmarks to ‘outperform’

Funds toying with benchmarks to 'outperform'