Strange, but true! How mutual funds beat the index!

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Here is a strange but true fact about how mutual funds beat the index! It is also the reason why I keep stressing on downside protection. Mutual funds that beat the index consistently find it easier to beat the index when it falls than when it rises! Here are numbers from the Dec 2018 freefincal Equity mutual fund screener


As regular users may know, the screener uses three metrics to analyze funds. (1) how frequently a fund beat the index also known as rolling return outperformance consistency. (2) How frequently a fund protected the downside that is fall less than the index (when the index fell) also known as downside protection consistency. (3) How frequently a fund performed better than the index when the index moved up, also known as upside performance consistency.

One might think downside protection without return outperformance is of no use. Yes, this is true. However, many investors also assume that upside performance is important or even essential for a fund to beat the index. This is wrong! As we will see below, downside protection is crucial and upside performance almost optional!

How mutual funds beat the index! Strange but true!

How mutual funds beat the index: The steps

  1. The screener file has 233 funds.
  2. Out of these, over 5 years, 112 funds have beat the index with >= 70% of the time.
  3. From these 112, If we count funds with downside protection consistency of >= 70% over 5 years, we get 87 funds.
  4. From the 112, If we count funds with upside performance consistency of >= 70% over 5 years, we get only 28!!

So let us abbreviate this information in the following way (five years):

233 –> 112 (return outperformance 5Y). Downside (5Y) = 87/112. Upside (5Y) = 28/112

If we repeat the process over  four years, we get

233 –> 119 (return outperformance 4Y). Downside (4Y) = 91/119. Upside (4Y) = 31/119

Finally over three years, we have

233 –> 103 (return outperformance 3Y). Downside (3Y) = 66/103. Upside (3Y) = 18/103

What do these results mean?

  1. It is easier for a fund manager to beat the index by protecting the downside that is making sure the fund falls less than the index than performing better than the index when the index is moving up.
  2. There are several corollaries that one can show: 37 out of 233 funds have 70% or more upside consistency. Out of these, 28 also have 70% or more return outperfromance.
  3. Although 158/233 funds have 70%+ downside protection, only 87 have consistently (70%+) beat the index. So upside performance (although in of itself rarer) seems to have a better chance of outperfromance than downside protection
  4. Only 25/233 funds have 70%-plus upside and downside performance over 5 years. Out of these 21 funds have 100% return outpeformance, 3 funds with 82%, 63% and 58% return outperformance. Two funds, DSP Top 100 and Can Reb Equity Diversified have 0% return outperformance!!
  5. Only 22/233 funds have 70%-plus upside and downside performance over 4 and 5 years
  6. Only 14/233 funds have 70%-plus upside and downside performance over 3, 4 and 5 years. From these 14, only the following 11 funds have return outperfromance of 70%-plus over 3,4,5 years!
EQ-L&MCNifty Largemidcap 250 TRIPrincipal Emerging Bluechip Fund – Direct Plan – Growth Option
EQ-VALNifty Largemidcap 250 TRIInvesco India Contra Fund – Direct Plan – Growth
EQ-VALNifty Largemidcap 250 TRITata Equity P/E Fund -Direct Plan Growth
HY-AHNifty 100 TRIPrincipal Hybrid Equity Fund- Direct Plan – Growth Option
HY-AHNifty 100 TRITata Retirement Savings Fund Moderate -Direct Plan Growth
EQ-MLCNifty Largemidcap 250 TRIAditya Birla Sun Life Equity Fund – Direct Plan
EQ-ELSSNifty Largemidcap 250 TRIAditya Birla Sun Life Tax Relief ’96 – Growth – Direct Plan
EQ-LCNifty 100 TRIReliance Large Cap Fund – Direct Plan Growth Plan – Growth Option
EQ-LCNifty 100 TRIMotilal Oswal Focused 25 Fund – Direct Plan
EQ-L&MCNifty Largemidcap 250 TRIAditya Birla Sun Life Equity Advantage Fund – Growth – Direct Plan
EQ-MLCNifty Largemidcap 250 TRIPrincipal Multi Cap Growth Fund-Direct Plan – Growth Option

So what you make out of all this?

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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1 Comment

  1. Professor, this article confuses me. If the goal is long-term investment, how will the combination of upside and downside performance effect index fund in comparison to mutual funds if an investor is saving for long term — say for retirement. And what if the investor uses a SIP and continues investing every month for 10 years, no matter what happens to the index.

    I am based in Canada, and here it’s considered almost a no-brainer to prefer index funds over mutual funds with a bulk invested in US-based funds and some in EMs (and bonds based on age profile). Very few mutual funds have been able to beat the S&P index in the long run. Only last year there were a few funds like Blackrock that performed better than S&P. Although reading up your article, it strikes me that it was perhaps long time since S&P had a big fall after an 8-year-old bull run.

    I wonder why the same does not apply to India? Or does it? Why are Indians not rushing to the likes of “NIFTY-NEXT50 index” and prefer to pay more than 2.5% MERs and 1% admin fees to mutual funds? Why do UTI, ICICI and other fund houses have almost no assets invested on indexes? I can see that banks have no incentive to sell index funds, but why aren’t Indians investing? Does 3% in additional fee on mutual funds offer any better value than say a low-fee index like “UTI nifty next 50 index fund” if the investment horizon is for 10 years? Please advise. Thanks!

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