Category Averages Don't Count the Funds That Didn't Survive

When a fund is compared to its “category average,” that average is almost always built from whichever schemes exist in the category today - not from every scheme that existed when the measurement period began. A fund merged into another scheme, or wound up entirely, simply isn’t on today’s list. It isn’t in today’s average either.

The drop-off is not small. A study of India’s large-cap category found that of 127 large-cap equity funds available at the end of 2007, 38 had merged or been liquidated by the end of 2017 - a ten-year survivorship rate of 70%. More recent S&P SPIVA India data, measuring five-year survivorship by category, shows the same pattern: roughly 80% for large-cap equity and government bond funds, but only 70% for mid- and small-cap equity funds. Three in ten mid- and small-cap schemes running five years ago are no longer around to be counted in today’s mid- and small-cap category average.

Funds don’t disappear at random. An AMC merges its weakest, smallest, or worst-performing schemes into stronger ones far more often than the reverse - a scheme with a shrinking asset base and a poor five-year record is a natural merger candidate; one with a strong record and growing assets is not. The funds most likely to vanish from a category are disproportionately its worst performers, which means a category average built only from survivors quietly drops exactly the observations that would have pulled it down.

Here is the mechanism on an illustrative set of ten funds:

Ten illustrative mid/small-cap schemes from five years ago - eight still exist, two were merged or closed. Numbers are constructed to demonstrate the mechanism, not drawn from real schemes.

The eight survivors return 14%, 16%, 11%, 9%, 18%, 13%, 15% and 10% - an average of 13.25%, the number a rating site would show today. The two that were merged away, at -2% and 3% before they disappeared, pull the true starting-cohort average down to 10.70%. The gap - 2.55 percentage points - exists purely because of which funds are still around to be counted, not because of any difference in how the calculation itself is done.

None of this means every category average is wildly wrong, or that every closed fund was a laggard - some mergers are pure business consolidation with no performance signal attached. It means a category average is a survivors’ average by construction, unless a report explicitly corrects for it the way SPIVA India does. The categories with the lowest survivorship - mid- and small-cap equity, in the data above - are exactly the categories where the gap between what a rating site shows and what actually happened to everyone’s money is likely to be largest.