Tipping Point: Are you aware of large-cap funds' survivorship bias?

Illustration: Binay Sinha
Survivorship represents the percentage of funds that are still active at the end of a period compared to the number present at its start. In the table given below, large-cap funds had the least survivorship among equity categories at about 78 per cent over the five-year period . 

Why is it important to keep survivorship bias in mind? Because it skews past returns of funds to look better than they actually are. Over a period of time, the mutual fund industry closes down or merges many of the funds that have not performed well. Once gone, their track record is not available any longer. As a result, the average performance of the funds that remain in a category looks better. The SPIVA report by S&P Dow Jones Indices corrects for survivorship bias.

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