After the fall, are 5-Year mutual fund returns still attractive?

12 Mar 2025 , 09:51 AM

MUTUAL FUNDS – FALLEN NOT DEFEATED

In the last few weeks, there have been frenetic debates about whether investors should persist with small cap and mid-cap funds; and whether SIPs should be continued or stopped. It is said that the data normally presents a true picture. We look back at the last 5 years, to check how various mutual fund categories have performed on an aggregate basis. We look at the returns on a risk-adjusted basis, to see if there are some warning signals. What emerged is that, shorn of the noise, most fund categories are still generating favourable risk-adjusted returns over a 5-year period. That is good news for your financial plan. After all, the biggest lesson learnt in the pandemic was that persisting with mutual fund SIPs is the surest way to laugh all the way to the bank! Here is how fund categories performed.

CAPITALIZATION FUNDS: RANKING ON 5-YEAR RISK ADJUSTED RETURNS

These are capitalization-equity funds on risk-adjusted returns; for 5 years to March 2025.

Active Equity Funds – MCAP	Average	Best	Worst	Range	Risk-Adj Returns
Large & Mid- Cap	19.57	26.06	14.43	11.63	1.6827
Large-Cap	16.61	22.29	11.90	10.39	1.5987
Multi-Cap	21.31	29.19	15.15	14.04	1.5178
Mid-Cap	22.91	32.05	14.30	17.75	1.2907
Small-Cap	26.82	43.50	20.35	23.15	1.1585
Flexi Cap	17.47	32.44	12.65	19.79	0.8828

Data Source : Morningstar

In our last ranking done in December, large cap funds had topped the list, while in March 2025, the large & mid-cap funds are at the top, followed by large cap funds. There are some key lessons that emanate. Large caps are lower on the risk scale, but in the midst of a macro sell-off, adding some mid-caps can actually help manage risk better. Once discretion scores low in the form of flexi-caps. The fund managers using discretion in this case, are creating risk, without creating commensurate returns. That explains the preference for multi-caps.

EQUITY THEMATIC FUNDS: RANKING ON 5-YEAR RISK ADJUSTED RETURNS

These are Thematic equity funds on risk-adjusted returns; for 5 years to March 2025.

Active Equity Funds – Thematic	Average	Best	Worst	Range	Risk-Adj Returns
Sector – FMCG	12.35	14.43	12.68	1.75	7.0571
Sector – Technology	25.73	28.14	22.62	5.52	4.6612
Equity – ESG	17.42	18.67	13.80	4.87	3.5770
Sector – Healthcare	23.35	28.40	19.56	8.84	2.6414
Contra	21.14	30.49	20.93	9.56	2.2113
Dividend Yield	22.11	29.61	19.48	10.13	2.1826
Value	21.04	27.22	17.00	10.22	2.0587
Equity- Infrastructure	25.59	36.64	20.41	16.23	1.5767
Sector – Financial Services	14.30	18.63	8.98	9.65	1.4819
Focused Fund	17.28	27.37	8.46	18.91	0.9138
ELSS (Tax Savings)	18.30	32.55	11.39	21.16	0.8648

Data Source : Morningstar

All equity funds (capitalization-based or thematic) have given positive CAGR returns over a 5-year period. FMCG, Technology, and Healthcare continue to score due to their defensive DNA; and risk management has mattered a lot more in March than in December. ELSS funds, focused funds, and financial services funds figure in the bottom due to higher volatility risk and the heterogeneity within the category.

HYBRID ALLOCATION FUNDS: RANKING ON 5-YEAR RISK ADJUSTED RETURNS

These are Hybrid funds on risk-adjusted returns; for 5 years to March 2025.

Hybrid Allocation Funds	Average	Best	Worst	Range	Risk-Adj Returns
Balanced Allocation	11.14	13.53	9.87	3.66	3.0437
Conservative Allocation	9.01	12.44	4.93	7.51	1.1997
Aggressive Allocation	16.13	25.08	10.75	14.33	1.1256
Equity Savings	9.96	15.43	2.04	13.39	0.7438
Dynamic Asset Allocation	12.04	22.85	3.59	19.26	0.6251

Data Source : Morningstar

There are 2 takeaways from the hybrid allocation fund story. Like in December 2024, it is again Balanced allocation funds that topped due to lower risk. Not surprisingly, the discretionary allocation funds like dynamic allocation funds (BAFs) and equity savings funds have figured at the bottom of the list. The moral of the story seems to be that in volatile times, discretion tends to backfire quite strongly.

ACTIVE DEBT FUNDS: RANKING ON 5-YEAR RISK ADJUSTED RETURNS

These are active debt funds on risk-adjusted returns; for 5 years to March 2025.

Active Debt Funds	Average	Best	Worst	Range	Risk-Adj Returns
Money Market	5.52	6.29	2.17	4.12	1.3398
Ultra Short Duration	5.37	7.02	2.67	4.35	1.2345
Government Bond	5.64	7.15	1.67	5.48	1.0292
Floating Rate	6.36	9.69	3.33	6.36	1.0000
Credit Risk	7.43	11.42	3.68	7.74	0.9599
10 yr Government Bond	5.27	6.27	0.52	5.75	0.9165
Banking & PSU	5.88	7.24	-0.03	7.27	0.8088
Long Duration	5.42	10.76	3.77	6.99	0.7754
Medium to Long Duration	5.71	8.78	1.29	7.49	0.7623
Corporate Bond	6.04	12.36	3.70	8.66	0.6975
Short Duration	6.14	10.01	0.57	9.44	0.6504
Low Duration	5.92	10.75	1.29	9.46	0.6258
Medium Duration	6.45	12.43	1.20	11.23	0.5744
Dynamic Bond	5.88	14.71	0.70	14.01	0.4197

Data Source : Morningstar

What is driving risk-adjusted performance in active debt funds? There are interesting takeaways at the top. The leaders include very short term funds like money market funds and ultra-short duration funds, longer duration funds like G-Sec funds, and even floating rate fund betting on rising rates. However, the performance has gravitated towards some of the short duration funds with limited fund managed discretion. Here again, discretion to fund managers has backfired. Categories like dynamic bond funds and medium duration funds have lagged sharply on risk-adjusted returns.

ALTERNATE FUNDS: RANKING ON 5-YEAR RISK ADJUSTED RETURNS

These are alternate funds on risk-adjusted returns; for 5 years to March 2025.

Alternate Funds	Average	Best	Worst	Range	Risk-Adj Returns
Sector – Precious Metals	12.96	13.76	12.76	1.00	12.9600
Arbitrage Fund	5.29	6.36	3.88	2.48	2.1331
Liquid	4.73	53.08	-2.51	55.59	0.0851

Data Source : Morningstar

Once again, it is precious metals (Gold and Silver Funds) that are driving the story. It is a classic mix of smart returns and very low volatility risk. Arbitrage funds have done much better than liquid funds, which is also indicated by the direction of MF flows in recent months. So, what is the moral of the story here? In volatile times, leadership is less about chasing returns and most about managing risk effectively. Smart risk management has the ability to magnify even mediocre returns. A key takeaway is that; once again too much fund manager discretion has backfired in terms of risk-adjusted performance.