Volatility a tough nut to crack for fund managers? Mere 31% active funds outperform benchmarks in 6-month period

Amidst heightened market volatility, a significant majority of actively-managed equity funds underperformed the benchmarks in the recent past, according to data analysed by Moneycontrol.

An analysis of returns of 481 equity mutual funds across 22 categories from Ace Equity showed that in the one-month period ending April 28, around 75 percent of the funds underperformed their benchmarks.

While underperformance trends were also evident over a six-month horizon, outperformance slightly improved, with around 31.45 percent of 496 funds beating their benchmarks though a significant majority — 69 percent – still ending in the underperforming category.

This comes at a time when the broader markets have been facing increased volatility over the last six months due to global uncertainty stemming from the tariff war and armed conflicts. The Indian stock markets have also been impacted by FII selling, valuation concerns, and mixed corporate earnings.

Over the last six months, the Nifty 50 has delivered negative returns of around 6 percent. Similarly, the Nifty Midcap and Smallcap indices have declined by around 12 and 16 percent, respectively. On the other hand, the Bank Nifty has gained nearly 1 percent.

Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth, says that this is not surprising, given how the indices have performed. Over the past six months, Indian equity markets have witnessed noticeable divergence and volatility across segments.

In the last three months, the small-cap index declined by approximately 8.8 percent, while the mid-cap index fell around 3 percent. In contrast, large-cap stocks remained relatively resilient, with the NIFTY 100 marginally negative at -0.8 percent, and the NIFTY 50 even showing slight positive movement.

However, even within the large-cap universe, there has been significant disparity — while the NIFTY 50 held up well, the NIFTY Next 50 is down nearly 7 percent.

This disparity in performance, according to Rajani, has led to underperformance of many diversified large-cap funds.

“Since these funds typically invest across the top 100 stocks, having allocations beyond the top 50 can negatively affect returns when only a concentrated set of large-cap stocks are driving market gains. The rally has largely been concentrated in a few heavyweight names. For example, funds with high exposure to Reliance Industries, like Quant Mutual Fund, have outperformed due to the stock’s recent rally,” she says.

Fisdom’s Head of Research Nirav Karkera concurs, adding that over the past six months, active funds have underperformed benchmarks primarily because market returns were driven by a handful of heavyweight stocks, while the broader market corrected sharply.

“Active managers, who maintain diversified portfolios and follow prudent exposure limits, were naturally less concentrated in these few names, leading to underperformance in a narrow rally,” he says.

However, Rajani also adds that much of the current concentrated market movement is widely seen as temporary. “The ongoing corporate earnings season has brought in some optimism, especially from the banking and financial services sector, which has delivered a solid quarter. Companies like ICICI Bank and HDFC Life Insurance have reported healthy profit growth, and asset quality has shown improvement, indicating a potential pickup in credit growth. As a result, sectors like banking, energy, and defence have buoyed market sentiment and lifted indices in recent weeks,” she explains.

Among specific categories, banking and financial funds were the best performing for both the one-month and six-month periods, with average returns of around 5.4 percent and 5.5 percent, respectively.

Is active management facing challenges in the market?

Ventura’s Juzer Gabajiwala believes that evaluating performance over just one or six months is too short a timeframe.

“Take small-cap funds, for example. Most hold 65–70 percent in small caps and the rest in large or mid caps. If small caps outperform and large caps lag, the benchmark can outperform the fund. Conversely, when large caps outperform, small-cap funds can beat the benchmark because of their large-cap exposure. This happened during COVID-19, when large caps did well and small-cap funds outperformed despite small caps lagging,” he explains, adding that fund performance should ideally be evaluated over a longer timeframe — three to five years — for a more accurate picture.

Karkera adds that in the current market environment, the role of active management becomes even more critical. “However, I believe that not all active strategies will perform equally. Those that stay focused, maintain high portfolio quality, and demonstrate brilliant stock picking are likely to stand out and deliver superior outcomes in the coming quarters,” he says.

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