Diversified equity mutual funds: Which top 5 schemes have outperformed their category over 3 years?

When comparing equity mutual funds, looking at returns alone can give only part of the picture. A fund may deliver strong returns over three years, but investors also need to see how those returns compare with the fund’s benchmark and whether the fund has added value over what the benchmark delivered.

Among diversified equity funds, some schemes that feature among the top performers by three-year returns also show strong benchmark outperformance.

ITI Small Cap Fund topped the list with a 25.31% three-year return, closely followed by Bandhan Small Cap Fund at 25.26%.

Invesco India Mid Cap Fund and HSBC Midcap Fund also delivered more than 23% over the three-year period, while Invesco India Small Cap Fund recorded 23.54%.

However, a high return does not by itself establish that a fund has outperformed its benchmark.

What is alpha in mutual funds?

Alpha measures the excess return a mutual fund generates relative to its benchmark after adjusting for risk. In simple terms, it indicates whether a fund has performed better or worse than what would be expected based on its benchmark and market risk.

A positive alpha indicates that the fund has generated higher risk-adjusted returns than its benchmark, while a negative alpha indicates underperformance.

The baseline for alpha is zero. An alpha of zero means the fund’s performance was in line with the benchmark on a risk-adjusted basis. For example, an alpha of +3 means the fund generated 3 percentage points of excess risk-adjusted return over its benchmark.

A higher positive alpha can indicate that the fund manager’s investment decisions, including stock selection and portfolio positioning, have contributed to performance beyond what the benchmark delivered.

Which 5 diversified equity funds have the highest alpha?

Across the diversified equity fund category, these five funds have the highest alpha.

ITI Small Cap Fund has the highest alpha at 10.83, followed by Motilal Oswal Large and Midcap Fund at 10.79 and Invesco India Large & Mid Cap Fund at 10.71.

Bandhan Small Cap Fund and Axis Multicap Fund follow with alpha of 10.31 and 9.39, respectively.

There is a clear overlap between the two lists. ITI Small Cap and Bandhan Small Cap feature among the top five funds on both three-year returns and alpha.

What about the other three funds that led in returns?

The other three funds in the top-five returns list — Invesco India Mid Cap, HSBC Midcap and Invesco India Small Cap — do not feature among the five funds with the highest alpha. However, this does not mean they have low or negative alpha.

Invesco India Mid Cap Fund has an alpha of 6.77, which is higher than the category average alpha of 1.55. HSBC Midcap Fund has an alpha of 7.70, also above the category average.

Invesco India Small Cap Fund has an alpha of 9.27, compared with the category average of 3.34.

This means that all five diversified equity funds that ranked among the top performers by three-year returns also have higher alpha than their respective category averages. Looking at both three-year returns and alpha therefore provides a broader view of a fund’s performance.

Disclaimer: This is purely for educational/informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.