Mutual Fund and ETF Investment Strategy

Equity Investment through Mutual Fund is growing at a very fast pace and so has been the number of Asset Management Companies in the market.Mutual Fund Companies charge a fees called expense ratio for managing the funds. ETF on the other hand track the broad market Index.The fees for ETF are lower (.05%-.2%) compared to MF(1%-2.5%). There are many articles on MF and ETF comparison weighing pros and cons of each.
A combination of both can be used to generate more optimum returns.A three tier  analysis of the Mutual Fund and ETF will give insights to construct  a robust portfolio :

  1. Comparison of  various Mutual Funds with  Benchmark Index(and Total Return Index)
  2. Dissection of a “Large Cap” marketed Mutual fund
  3. Replication of Portfolio with ETF,Index Funds and Small Cap fund.

Total Number of Funds  in Large Cap Category: 114

Total Funds older than 5 year :90

Nifty 50 and Nifty Next 50 Total Return Index (includes dividend) Annualized Returns across various  period

Index1Y Return3Y Return5Y Return
1Nifty 5015.29%9.46%12.17%
2Nifty Next5012.11%16.18%19.19%
3Nifty 50 TRI16.60%10.77%13.46%
4Nifty Next 50 TRI14.29%17.93%20.85%


Out of 90 funds 36 were able to beat Nifty 50 Total Return Index Return for 3 year. I took the 3  year period because if you compare older returns you will see more Mutual Fund out performance because market was not very efficient and lot of alpha was there to pick which has gradually eroded mostly in the Large Cap space.

Below is the List of funds which made the cut.

SchemeReturn 1YReturn  3YReturn 5y
1Tata Equity P/E13.80%18.30%24.80%
2Sahara Power & Natural Resources6.20%16.80%16.80%
3IDFC Focused Equity21.90%13.80%15.30%
4Tata Retirement Savings Progressive16.70%17.80%20.20%
5Axis Focused 2520.70%17.50%18.00%
6JM Core 1111.40%15.10%18.10%
7Canara Robeco F.O.R.C.E17.50%15.70%18.30%
8ICICI Prudential Indo Asia Equity12.30%11.20%18.90%
9Templeton India G12.40%14.50%17.10%
10Invesco India G22.30%14.30%19.40%
11Reliance G12.90%13.80%19.90%
12Sahara R.E.A.L -G13.80%17.30%24.10%
13Kotak Classic Equity -G20.70%12.60%15.80%
14Aditya Birla Sun Life India GenNext -G14.50%16.20%19.80%
15Kotak Select Focus -G10.10%14.80%20.70%
16HDFC G13.70%13.30%15.20%
17BOI AXA Equity20.70%12.70%16.30%
18ICICI Prudential Dynamic-G12.60%11.90%17.80%
19ICICI Prudential Focused Bluechip Equity -G15.30%12.50%16.80%
20Sundaram Select Focus16.20%11.20%13.90%
21ICICI Prudential Top 100 -G9.10%11.30%16.40%
22HSBC Equity -G13.40%11.80%14.30%
23Indiabulls Blue Chip -G12.40%13.30%13.70%
24Escorts High Yield Equity-G4.70%15.70%23.90%
25Escorts G17.20%15.10%22.00%
26Principal Large Cap -G12.60%11.00%15.80%
27UTI Equity18.30%11.60%16.80%
28Invesco India Dynamic Equity -G14.50%11.40%15.40%
29Axis Equity -G20.70%12.00%15.10%
30Escorts Leading Sectors -G16.70%14.70%23.10%
31Canara Robeco Large Cap+12.50%10.80%13.80%
32Aditya Birla Sun Life Top 100 -G9.80%11.30%17.40%
33Peerless Equity -G7.40%12.70%13.80%
34Invesco India Business Leaders -G16.10%10.90%15.40%
35SBI Blue Chip13.20%12.50%17.90%
36Quantum Long-Term Equity -G9.00%12.70%16.10%

So 40%(36/90)  were able to beat Nifty.Lets go one step further and see what holdings these so called “Large Cap” Funds have.I will take SBI Blue Chip as it is quite popular in the Large Cap Category.Here is a snapshot of the holdings:

Wow its marketed as a Large Cap Fund and  it has not more than 50% in stocks with market capitalization more than 50000 Cr .Well the thing is categorization by market cap  is very subjective and  often misused.

Its not fair to compare a multi cap fund to Nifty 50 TRI index. We should compare it to atleast Nifty 100 .ie.  50%Nifty50 and 50%Niftynext50 which  gives around 15% return!!! Using this benchmark hardly 10%  funds  are beating Index investment.Picking the ideal Mutual Fund is  again a matter of luck to an extent !

Now another surprise

Around 8% of money is in cash generating close to 6%. Its not a bad thing to keep money as cash and deploy when right time comes but what if we can generate higher return from that cash! .Secondly it means that Fund Manager is using 92% money to invest and beat 100% of Index.Doing this consistently is tough .

So summarizing what inference we have drawn:

  • Most Mutual Funds are not able to beat total return index
  • Most Large Cap Funds are generally Multi Cap Fund
  • Around 5-10% of money is parked as cash.

Now lets say Mr X bought 3 funds (1 Large Cap,1 Mid Cap,1 Small Cap) .In reality he is holding some amount of Nifty and lot of Small and Midcaps. How can he get the same exposure more efficiently. What we do is we replicate our portfolio using low cost Nifty  ETF, Nifty Next50 Index fund and one small cap fund for the Alpha.We put the extra cash according to our risk appetite. I will demonstrate in my next post how I replicated a mutual fund portfolio and achieved higher return at lower volatility.


2 thoughts on “Mutual Fund and ETF Investment Strategy”

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