Insight: Screening for mutual funds with consistent outperformance

Published: September 22, 2017 at 9:51 am

Last Updated on

When we wish to choose a mutual fund, it is reasonable to expect it to have beat a benchmark (either the one chosen by the fund house or one representative of its category) consistently – say 8 times out of 10. Can we also impost an additional constraint? Expect the fund to fall lesser than the benchmark? Is that reasonable? Is there any correlation between the two? Here are some insights from the Sep 2017 Freefincal Equity Mutual Fund Outperformance Screener.

Announcement: As part of Diwali sales, my first book: You can be Rich Too with Goal-Based Investing is available for a 28% discount (rs. 286) at Amazon and at a discount of 37% (Rs. 251) at FlipkartYou can also get my second book Gamechanger for Rs. 199 (Kindle Rs. 100) at Amazon

Three-year data

Rolling returns over a 3-year period was considered for 316 funds. For eg. if we consider funds from April 3rd 2006 (the oldest date for which NAV is available), to Sept 8th 2017, we can find 2008, 3-year data points. For funds that were started after April 2006, the no of 3-year data points will be correspondingly lower.

For 54 out of the 316 funds, 80% of the total no of  3-year returns were higher or equal to than the category benchmark/index (see the index list in the above post). Or in other words, the 3Y rolling return outperformance consistency >= 80%.

If we consider this 54 fund subset, only 8 funds had an upside capture consistency of >= 80%. That is, 8 funds show a tendency to outperform the index when it moves up (higher positive return than the index).

On the other hand, 22/54 funds had a downside capture consistency of >=80%. That is, 22 funds show a tendency to outperform the index when it moves down (lower negative return than the index).

These results are summarised below.

Similar data over 5Y and 7Y is shown below.

Five-year data

Seven-year data

For the Sep 2017 screener data, a trend is reasonably clear: about 50% of the funds consistently outperform an index, do so via downside protection – capturing a loss less than that of the index.

Upside performance – capturing more gains than what the index makes does not seem to have enough representation.

At least for this month, this trend is heartening. It is not hard to spot a fund that beats the benchmark by lowering the extent of falls.

Downside capture consistency >= 80% AND upside capture consistency >=80%

Over 7 years, only 4/230 funds have this.

Over 5 years, only 4/274 have this.

Over 3 years, only 9/316 funds have this.

I am intrigued by this. There seems to be a mutual exclusivity between funds with good upside performance and funds with good downside protection.

Out of this 9, there is a fund (can you spot it?)  that shows

downside capture consistency = 100%

Upside capture consistency = 86%

rolling return outperformance consistency of 1/426. That is out of 426 3-year returns, the fund has beat the index (Nifty Next 50) only once!

Its investment objective (source: VR)

The scheme aims to follow bottom up stock picking, without any bias for sectors or market capitalizations. The scheme will attempt to be fully invested in equities at all times, however, upto 20 per cent of its assets can be invested in cash and cash equivalents.

So that justifies the use of Nifty Next 50: The Benchmark Index That No Mutual Fund Would Touch for the analysis.

Question is,  Will you invest in such a fund? I am preparing a risk profiler. So this question will make a fine addition to it 🙂

Finally, if we insist on

rolling returns outperformance consistency >=70% over 3Y and 5Y and  7Y

AND

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! 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! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

downside capture consistency >=70% over 3Y and 5Y and  7Y

We would get the following funds (not a recommendation and valid only for Sep 2017 screener).

What do you think?

Download the Freefincal Monthly Mutual Fund Screener (September 2017): Risk vs Reward Consistency

User guide (done with an older version, but steps are same):

Use this form to ask Questions or reg. the robo template ONLY (For comments/opinions, use the form at the bottom)

And I will respond to them in the next few days. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you.  PLEASE DO NOT POST COMMENTS WITH THIS FORM it is for questions only.

[contact-form][contact-field label=”Name” type=”name” required=”1″][contact-field label=”Email” type=”email” required=”1″][contact-field label=”Ask your question (Got an opinion or comment, use comment box at the bottom of the page. DO NOT post them here)” type=”textarea” required=”1″][/contact-form]

GameChanger– Forget Startups, Join Corporate & Live The Rich Life You want

My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantco-authored with Pranav Surya is now available at Amazon as paperback (₹ 199) and Kindle (free in unlimited or ₹ 99 – you could read with their free app on PC/tablet/mobile, no Kindle necessary).

It is a book that tells you how to travel anywhere on a budget (eg. to Europe at 50% lower costs) and specific investment advice for young earners.

The ultimate guide to travel by Pranav Surya 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 ₹199 (you will be emailed the pdf after payment)

You Can Be Rich Too with Goal-Based Investing 

My first book with PV Subramanyam helps you ask the risk questions about money, seek simple solutions and find your own personalised answers with nine online calculator modules.

The book is available at:

Amazon Hardcover Rs. 271. 32% OFF

Infibeam Now just Rs. 270  32% OFF. If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!

Flipkart Rs. 279. 30% off

Kindle at Amazon.in (Rs.271) Read with free app

Google PlayRs. 271 Read on your PC/Tablet/Mobile

Now in Hindi!

Order the Hindi version via this link

 

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

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 Pattabiraman editor freefincalM. 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] com
About 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. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. 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
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished 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 Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis 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 earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new 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