Best Active Equity Mutual Funds That Performed Better Over the Past 4 Years
An active fund is a mutual fund that a fund manager actively manages, aiming to do better than a benchmark index. The fund manager has the right to decide which securities to buy, sell, or hold. As on October 2024, the cash holding in active equity mutual funds was Rs. 1,46,957 crore, amounting to 4.91% of the category assets.
After facing a lot of ups and downs in the last quarter of 2024, the Indian stock market has become more unstable this January. Foreign investors are selling more shares due to a stronger US dollar and rising US bond yields, which is making investors lose confidence. Foreign investors have sold shares worth a net total of Rs. 40,055 crore as of January 16, according to data from the NSDL website.
Morgan Stanley and Ambit Capital have reported that in 2025, the equity market will favor stockpickers. This means the right choice of stocks will be important. For investors who are focusing on equity, actively managed mutual funds can be a better option.
On the other hand, not all actively managed mutual funds perform well, so it’s important to choose the right ones to balance risk and return effectively. Focusing on risk-adjusted metrics can help identify high-quality active equity funds in the current market scenario. Equities are invested into securities that experience both systematic as well as unsystematic risk, so return should be valued at the given level of risk.
The Sharpe ratio is a standard risk-adjusted measure that shows how well a fund performs compared to the risks it takes. It tells how much extra return a fund generates for every unit of total risk it faces. Total risk contains two types, namely systematic risks, which have their origin from market-related factors affecting all the investments, and unsystematic risks, caused by internal or company-related factors. In simple terms, the Sharpe ratio helps find out whether the returns of a fund are justified with the risks that are involved in it.
Excess return is found by subtracting the fund’s return from the risk-free rate. The Sharpe ratio is calculated by dividing the excess return by the fund’s standard deviation, which measures its total risk. The higher the Sharpe ratio, the better the fund’s returns are in relation to the risk it takes.
Here are 9 equity funds, and the aggregate AUM of these nine funds reached Rs. 2.2 lakh crore at the end of November 2024 and increased by 67.8% to the previous year. In comparison, the AUM of all equity-diversified funds increased by 44.3% during the same period.
Sharpe ratio is another standard risk-adjusted measure, demonstrating how well a fund works relative to the risk taken. A lower expense ratio means lower investment costs for investors. In terms of performance, all nine funds outperformed their respective benchmarks in the last year, and eight outperformed their benchmarks over the last three years.
The nine funds listed have also outperformed on another risk-adjusted measure known as Jensen Alpha. This is a measure of how the actual returns of a fund compare with its expected returns, based on the level of risk it carries. Alpha is said to be positive if the fund has outperformed and negative if it has underperformed. For the past year, all nine funds were reporting positive alphas, higher than the average alpha produced by all equity-diversified funds.
These funds included the portfolio composition of quite a few common stocks like Zomato, HDFC Bank, Bharat Electronics, Persistent Systems, and Fortis Healthcare. When looking at the sectors, based on the shareholding in November 2024, the favourite sectors among all the funds picked up were the ones in the areas of banking & finance, automobiles, capital goods, healthcare, and retailing.
