Here is a simple way to select mutual funds that have beat the category benchmark in terms of both return and risk over the last one, two, three, four and five years simultaneously! That is higher than the benchmark return and lower than benchmark risk.
Unlike return, risk can be measured in many ways. The simplest and most common measure of risk is the standard deviation. We look at a mutual fund’s daily returns and determine how much they deviate from the average daily return over say a year or three years. This tells us how volatile the fund is. A fund with lower risk is one with a lower standard deviation than a benchmark.
The excess return of the fund = Five-year return of the fund minus the five-year return of the index. We need this to be positive. We have used a five-year return as an example here.
The Excess risk of the fund = Five-year standard deviation of the fund minus five-year standard deviation of the index. So if the excess risk of the fund is negative it means the fund has taken lower risk than the index and vice versa.
Both these measures are plotted against each other for five years for funds across categories. Clearly, we are looking for funds with higher return and lower risk. That is we are looking for funds with a positive excess return and negative excess risk.
This screening is only over five years. To gauge performance consistency, we repeat the above test for one, two, three, four and five year periods. That is a fund must be within the blue box for all the periods simultaneously!
These are the number of qualifying funds in each category. The total number of funds are mentioned within brackets.
| Category | No of qualifying funds |
| Aggressive Hybrid Fund | 6 (33) |
| ELSS | 0 (42) |
| Focussed Fund | 2 (18) |
| Large & Mid Cap Fund | 2 (24) |
| Large Cap Fund | 3 (29) |
| Mid Cap Fund | 4 (23) |
| Multi-cap Fund | 4 (34) |
| Sectoral/ Thematic | 4 (85) |
| Contra funds | 0 (3) |
| Dividend Yield | 0 (6) |
| Small cap Funds | 1 (20) |
| Value Funds | 0 (14) |
Only 51 out of 331 or 15% make the shortlist! This lower risk, higher reward screening is automatically applied in the monthly freefincal equity mutual fund screener. This is the September 2020 Equity Mutual Fund Performance Screener which also has rolling return and rolling downside capture screening capability. This is a video guide for using the screener.
Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author
M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman 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. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earnerYour Ultimate Guide to Travel
This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "FU" to your employer (Google Play Store)
