Do top equity mutual fund managers succeed by mainly buying Nifty stocks?
Jason Monteiro | 15 January 2014

Equity fund managers have a public image of being experts in discovering stocks that will do well over time. But the reality is different. They play safe. The portfolios of many top equity mutual funds have an allocation of over 60% to the stocks present on the CNX Nifty Index. Take a look at this chart which describes the extent of exposure each fund has to Nifty.




In the portfolio of the top 20 schemes (Read: Equity Schemes for any Season) on an average, 58% was allocated to Nifty stocks. Of these, 11 schemes had an allocation over 60% to Nifty stocks. The lone exception was ICICI Prudential Discovery Fund and to some extent Reliance Equity Growth Opportunities Fund and Franklin High Growth Companies.

Indeed, as you can see from the graph below, the top equity mutual fund schemes on an average invest in 50 stocks, out of which around 22 stocks are present in the Nifty.

Further, from the graph below you can see that out of the 20 schemes, 11 invest in 20 or more Nifty stocks.

Why do most fund managers stick to index stocks?  Because their fund performance is compared to that of the benchmark. They don’t want to take a chance in buying too many stocks not in the index and then finding that their performance is falling short of the index. As John Maynard Keynes has said: “It is better for reputation to fail conventionally than to succeed unconventionally.”

Do equity mutual fund managers just buy the stocks in major indices?

The graph below shows 145 large- and multi-cap schemes, on an average, 60% of the portfolio is allocated to stocks present in the Nifty. That is, as many as 109 out of the 145 schemes have an exposure of more than 50% to the stocks present in the index. Out of the 145 equity diversified schemes, 100 schemes have an average exposure of more than 80% to stocks present in the BSE 200 index.

Around 50 schemes invest over 90% of their portfolio to stocks present in the BSE 200 index. Even the scheme with the lowest exposure invests 60% of its portfolio in stocks of BSE 200.

Should this worry you? After all, fund companies annually charge you over 2% for actively selecting, buying and selling stocks. If your fund manager is putting your money in Infosys, ITC, HDFC and so on, you might as well buy an index fund which charges around 1.5%, or better still, buy the index stocks yourself in the right proportion.