28-04-2025
Nilesh Shah lists 5 key challenges faced by mutual fund managers in generating alpha
This alpha generation / outperformance is despite constraints of
- Fund keeps cash to provide Daily Liquidity. Index doesn't have any cash. Cash creates a drag on Fund Performance by 50 bps to 100 bps.
- Index can have more than 10 % weight in a Stock. Fund weight is capped at… — Nilesh Shah (@NileshShah68) April 27, 2025
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Rolling Return Alpha / Outperformance over Benchmark Index — Nilesh Shah (@NileshShah68) April 27, 2025
First They said fund managers don't outperform they said large cap fund managers don't outperform index. Then they said small and mid cap fund managers don't outperform Index. now they say Fund Managers don't outperform index on a five year risk adjusted basis.
Going… — Nilesh Shah (@NileshShah68) April 27, 2025
Despite various constraints, Kotak Mutual Fund's schemes have been adding value to investors' returns — generating alpha on SIP , point-to-point, and rolling return basis. Nilesh Shah , managing director of Kotak Mutual Fund , noted that this outperformance is akin to fund managers running a hurdle race while being held accountable as if they were running a normal sharing five constraints, Shah said that the fund keeps cash to provide daily liquidity, the index doesn't have any cash and keeping cash in the portfolio creates a drag on fund performance by 50 bps to 100 second constraint, according to Shah, is 'Index can have more than 10% weight in a Stock. Fund weight is capped at 10%. Most Funds have to book profit when stock weight goes above 10%.' The third constraint is that index changes happen at the closing price, whereas the fund has to bear the impact cost of buy and sell next constraint, shared by Shah, is that the Index doesn't have any transaction costs, whereas the fund has to incur transaction costs for entry and exit from stocks/investors.'Globally Fund performance is compared gross of expenses with total return Index. We compare net of expenses fund performance with the Total Return Index,' Shah wrote on social media platform X (formerly Twitter).The schemes managed by Kotak Mutual Fund have generated alpha or outperformed the benchmark index across different timeframes, such as three-, five-, seven-, and 10 years, based on SIP returns, rolling return, and point-to-point returnsShah compared what many investors or people say about the fund managers when there is a slight underperformance against the benchmark with reference to a popular dialogue from the Devdas movie.'First, they said fund managers don't outperform index. Then they said large-cap fund managers don't outperform index. Then they said small and mid-cap fund managers don't outperform index,' Shah of Kotak Mutual Fund wrote on X.'Now they say Fund Managers don't outperform index on a five-year risk-adjusted basis. Going forward, what will they say ?' he added.
