What makes HDFC Equity Mutual fund one of the oldest and successful funds?

It is always an interesting question. What makes an mutual fund equity fund scheme successful over a long run?

Based on efficient market theory, one should not really be seeing a active mutual fund beat markets over a long run. I mean some short term performance can be signalled to just luck which reverses soon as we see all the time. Over time one also expects markets to become more efficient leading to decline in performance of active funds. Even if we disregard efficiency theory, it is difficult to imagine anyone can really have the skills to beat markets consistently over a long run.

However, some mutual funds in India continue to perform and beat the benchmark by quite a margin. HDFC equity fund is one such fund:

A sum of Rs 10,000 invested in HDFC Equity Fund at its inception 20 years ago would have grown to Rs 4.7 lakh by now. If an investor would have opted for a systematic investment plan in the fund of Rs 2,000 a month, he or she would now be sitting on Rs 1 crore. With Prashant Jain as fund manager, it is now one of the longest running equity schemes in the Rs 12 lakh crore domestic mutual fund (MF) sector. It had Rs 52 crore in assets under management in 1995; now, this has become Rs 18,000 crore. The biggest MF and one of the most successful, with a compounded annual growth rate of a little over 20 per cent.

The scheme has held steady during all major market-moving developments of the past two decades. In its first decade, the scheme witnessed the Asian currency crises, the infotech bubble of 2000, the Ketan Parekh scam and crisis in Unit Trust of India. In the second decade, there was the Bharatiya Janata Party’s loss in the general election of 2004 and the Congress-led coalition’s two subsequent wins, the global financial crisis of 2008, followed by scams like Satyam, telecom and coal allocation, among others. Also, the multiple quantitative easing programmes.

The fund has outperformed its benchmark, the CNX 500, for 18 of the past 20 years. The minimum positive absolute return it generated was 22.6 per cent in 1997 and the highest was in 1999, at 156 per cent. In 2014, the fund gave 53.8 per cent, the highest in five years. 

“Equities are volatile in the short term but in the longer term, it outperforms virtually every other asset class,” says Jain. Adding: “We might or might not do well at times but one thing we have done successfully is that we have not lost serious money. Preventing big mistakes is more important to long-term return than going for the big returns (in a short time).”

Poor performance of some schemes managed by Jain between 2011 and 2013 had got several criticism by market participants. However, it did not make him change his philosophy and the patience has paid in the long run.

HDFC equity fund is not alone in the list. There must be others as well.

The evidence of their success runs contrary to Indian markets getting more efficient theory. Ideally, one should be seeing transition of the industry from active managed funds to passive/index funds. But it has only gone in the opposite direction with active funds continuing to outperform benchmarks..

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