How Mutual Funds Have Outperformed Stocks

When it comes to investing in the stock market, there are two primary ways in which you can invest – direct equity and mutual funds. Direct equity is still a good bet, since it is capable of fetching you good returns over the short term. However, when it comes to long-term performance, mutual funds are in an indisputable position.

Historically, mutual funds have managed to outperform even individual stocks over the long term. The numbers seem to back up this claim too. Take a look at the table below. It gives you a fair idea of how the top performing mutual funds in India stack up with respect to individual stocks.

Name of the Fund
5-year return (%)
Name of the stock
5-year return (%)
ICICI Prudential Bluechip Fund
SBI Magnum Multicap
Hindustan Unilever
SBI Bluechip Fund
Mirae Asset Emerging Bluechip Fund
Sun Pharma
Kotak Standard Multicap Fund
Ultratech Cement

Barring HDFC Bank and Hindustan Unilever, these 5 top performing mutual funds in India have managed to outperform all the other stocks in the list. In fact, Mirae Asset Emerging Bluechip Fund, with its 30.29% return has managed to outperform all the stocks in the list. This simply reaffirms the fact that actively managed mutual funds have the potential to perform much better than stocks over the long-term.

This statement holds true even during the current COVID-19 pandemic. Almost all of the stocks took a beating during the March, 2020 sell-off. As a matter of fact, many mutual funds also faced the brunt of the crash, with equity mutual funds witnessing the first monthly outflow in about 4 years.

That said, even the stock market crash couldn’t stop MFs from performing better than individual stocks. Focused mutual funds, especially those that focus on gold and the pharma industry, saw unprecedented levels of growth in the past one-year. Gold mutual funds witnessed a growth of around 37% in the last one year, whereas pharma sector MFs enjoyed returns of around 58%. Among the pharma focused MFs, the DSP Healthcare Fund, with returns of around 69.80%, saw the maximum amount of return generation in the last one year, making it one of the top performing mutual funds in India.

Why do the best mutual funds outperform stocks?
Now that you’ve seen how some of the best mutual funds in India fare in comparison with stocks, let’s try to understand the logic behind why MFs tend to outperform individual stocks.

Mutual funds are diversified investment products
One of the primary reasons for the outperformance of mutual funds is the diversification factor. Since MFs invest the funds in a wide range of companies across sectors, industries, and market capitalization, the risk of non-performance is reduced to a large extent. However, the same cannot be said with respect to individual stocks.

For instance, when you invest in an individual stock whose performance turns out to be below par, you need to bear the brunt of the entire risk. But, with a mutual fund, even if a couple of its portfolio constituents face underpar performance, the rest of the companies might be able to nullify or reduce the risk by performing according to the expectations.

Mutual funds are actively managed
Generally, fund houses appoint a dedicated team of fund managers to actively manage the mutual fund. These fund managers are highly qualified professionals with decades of stock market experience. They ensure that the performance of the mutual fund is according to the expectations.

Fund managers constantly rebalance the MF portfolio and churn out non-performing stocks in favor of stocks that exhibit strong performance. The level of control and knowledge that these dedicated individuals bring to the table is unmatched. This makes mutual funds a better investment option.

Mutual funds invest in fundamentally strong companies
The fund managers and mutual fund houses are well-known for conducting in depth fundamental analysis of companies before inducting them into the portfolio. They thoroughly analyse every aspect of a company including its financial performance and corporate governance policies and procedures.

While this exercise is laborious, it ensures that the companies in a mutual fund are fundamentally strong and capable of delivering good returns. This sort of an extensive exercise may not be possible when choosing individual stocks to invest in.

That said, not all mutual funds tend to outperform stocks. Therefore, it is very important to choose the best mutual funds to invest your money in. One way to do this would be to analyse the historical performance of the fund and how it has reacted throughout the various market cycles. This way, you can pick the right mutual fund and ensure that you get better returns.