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.
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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 money management topics. 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 based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni 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 paid articles, promotions, 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)
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