Freefincal Monthly Mutual Fund Screener (July 2017): Risk vs Reward Consistency

The July 2017 Freefincal Mutual Fund Screener is out! This tells you how consistently a fund has beat its chosen category benchmark over 3,5,7 year periods. In addition, its consistency in downside protection and upside performance is also included, along with lump sum and SIP returns over 1,2,3,4,5,6,7,8,9,10,11 year periods.

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Regular readers may be aware that I was publishing two separate files – one that contained the outperformance consistency and another with the returns. Now that a rolling upside/downside capture calculator is available, from this month on a single screener file will be published each month integrating all available data.

Request your feedback

This screen (in its present form) will be part of the back-end for my open-source robo-advisory portal. Therefore, I request readers to play with this screener and let me know their experience.

When to use this mutual fund screener

I recommend using this file only when you are on the lookout for a new fund after completing the following steps:

Define need and duration —-> Decide asset allocation (use this tool) —-> Decide product category (use this guideline for mutual funds) —-> Then use this screener for equity funds.

Since the debt mutual fund space is constantly shifting and a qualitative search is necessary, I believe it is dangerous to build a debt mutual fund screener and therefore will not.

Category Benchmarks Used

CategoryCategory CodeBenchmark
BankingEQ-BANKBSEBankex-TRI
FMCGEQ-CGBSEfmcg-TRI
InfrastructureEQ-INFRABSEInfra-TRI
InternationalEQ-INTLNifty Next 50 TRI
ITEQ-ITBSEIT-TRI
Large capEQ-LCBSELargeCap-TRI
Mid-capEQ-MCNifty Next 50 TRI 
Multi-capEQ-MLCNifty Next 50 TRI 
OthersEQ-OTHNifty Next 50 TRI
PharmaEQ-PHBSEhealthcare-TRI
Small CapEQ-SCNifty Next 50 TRI
ELSSEQ-TPNifty Next 50 TRI 
BalancedBalancedBSE Balanced Index

Why is the Nifty Next 50 TRI used for many categories? Because it is quite hard to beat, even by pure small-cap funds. However, this is only from the point of view of reward.  Risk outperformance should also be considered (see below).

Mutual Fund Outperformance Consistency Score (Reward measure)

Rolling returns are a simple way to estimate how consistency a fund has outperformed a benchmark. Three-year rolling returns have been considered. For example, suppose 1000 such 3Y returns are available for the fund and 800 such returns for the benchmark. Here is an example:

icici-focussed-blue-chip-rolling-retuns

We ask how many times has the fund got a better 3Y return than the benchmark. Suppose 500 such fund returns are higher, the performance consistency score is computed as

= 500/800 = 63%.

The minimum of (1000 and 800) = 800 is used in the denominator.

Higher the consistency score, the better the fund has performed with respect to the benchmark.Using the Mutual Fund Screener.

Mutual Fund Capture Ratio Consistency Score (Reward and Risk measure)

The upside capture is a measure of excess gains when compared with the benchmark. For example, an upside capture of 110% over 3 years implies, that the fund has captured 10% more than the benchmark, when the benchmark monthly returns were positive. Higher the upside capture, the better.

The downside capture is a measure of loss protection. For example, a downside capture of 80% over 3 years implies that the fund has only captured 80% of the benchmark losses when  the benchmark monthly returns were negative. Lower the upside capture, the better.

Please read this for more details: An introduction to Downside and Upside Capture Ratios.

The screener calculates upside capture and downside capture on a rolling basis over 3Y, 5Y and 7Y periods and calculates a consistency score.

upside capture consistency = no of times upside capture was > 100%/(total no of upside capture points)

So higher the consistency, more aggressive is the fund in outperforming the benchmark during up-market months.

downside capture consistency = no of times downside capture < 100%/(total no of upside capture points)

So higher the downside capture consistency, better is the fund in protecting investor money during down market months.

Those who sing praises of the NIfty Next 50 as a better choice than active funds must recognise that active funds provide downside protection and not just performance for the higher expense fee that we pay them. There is more to investing than just higher returns.

The screen I have used

The data can be screened in multiple ways. I have set 3Y, 5Y and 7Y rolling return outperformance to be greater than 80%. This reduces the sample set to 38 across categories. Then one can look for funds with high downside capture consistency and select by filtering out categories as shown below.  Remember it is DIY investing.

Using the Mutual Fund Screener

The screener sheet in the file contains all entries. To display only one or two categories, the user can click on the grey square (red oval below), then uncheck “select all: and then select the categories required. The screener is easy to use with Excel’s data filters.

mutual-fund-screener

If the no of rolling return entries is less than 500 then the fund is quite young to be judged. Higher the entries, the better.

Select a cut off for the consistency score: Above 60% or above 70% as mentioned above and check the funds which have done well. You can use this in combination with the Sep 2016 returns listing.

User Guide

This video does not include the rolling upside, downside data, but the spirit is the same.

Download the Freefincal Monthly Mutual Fund Screener (July 2017): Risk vs Reward Consistency Thanks to Nilesh Gadge for spotting an error in the sheet. Now corrected.

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