Insight: Screening for mutual funds with consistent outperformance

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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.

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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


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):

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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. Hi Pattu,
    I am not getting an intuitive understanding of what Capture Ratio Consistency means. For example(1st row of the excel sheet), if the Upside Capture Ratio Consistency is 26.47%, Downside Ratio Consistency is 63.73%, then how is the Capture Ratio Consistency is 22.55% (for the 3yr rolling periods) ?

    1. The capture ratio consistency is independent of both upside/downside consistencies. The capture ratio for all available 3Y/5Y/7Y periods are considered (individual capture ratio = upside capture/downside capture).

      No of capture ratios> 100%/(total no capture ratio data points) gives the capture ratio consistency.

  2. Out of the funds screened for upside capture consistency and downside capture consistency, do you see any overlapping list of funds? Just curious.

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