A simple way to screen mutual funds using downside capture and upside capture ratios is discussed. The capture ratio data obtained for equity-cap funds is used as an example.
With such a batach analyzer, it is a simple task to get the data for other fund categories. However, it is also boring – one needs to match VR fund name with AMFI name and code. Will do this when I feel strongly enough about it.
Mutual Fund Screening Basics
- Results will change from month to month as the data is on a trailing basis
- Wider the screening criterion, lesser the change and vice versa.
- The idea of a screener is to shortlist a handfull of funds from a big list. Not to select one fund or the best fund.
- After narrowing it down to a few funds, the investor needs to evaluate the reputation of the fund house and read the investment strategy of each fund to choose one.
- Although there are nine years of data available, it maybe prudent to just focus on ‘good performance’ in the last 5 years or so.
Presented below are a few examples and suggestions. Use them as a guideline, nothing more.
The datasheet contains,
- downside capture ratio -lower the better
- upside capture ratio -higher the better
- Capture ratio (upside/downside) – higher the better (but there could be exceptions , see below)
- SIP returns 1,2,3,4,5,6,7,8,9 years
- Lump sum returns 1,2,3,4,5,6,7,8,9 years
Here are a few sample screens. First, I have chosen an extremly narrow screen – ALL SIP returns should be above average.
These are the results.
That is a good number of funds. Now let us observe the coresponding downside protection data.
Notice that fund with above consistetnly average SIP returns have pretty good (low) downside capture ratios. That is, they capture very little of their benchmark returns.
Question now is, ‘why should I use this capture ratio screener? Why can’t I use the Mutual Fund Screener with SIP Returns or the Mutual Fund Screener- Google Sheets Edition?’
I strongly believe that consistent downside protection is responsible for superior returns. So using returns screeners should be enough.
However, a returns screener focuses on returns and not on the journery.
Here are three panels of sample screens.
Top panel: If we demand downside protection to be below average then the list is empty!
Middle panel: Relax above restriction for 1Y, then we get just one fund – Sundaram Select Mid-cap. This have given some good returns and has great downside protection.
However, take a look at its upside protection (Bottom panel). It is pretty poor. This results in a poor capture ratio as well (upside/downside). This suggests that the fund may not capture much of the benchmarks gains. This could be stressful for the investor.
An alternative strategy would be to focus on the capture ratio.
A capture ratio above 1 is a considered good. This typically implies good downside capture and good upside capture. Such funds maybe less stressfull to invest in.
Here is a screen with above average capture ratios and above average returns for a few years (4Y and above).
You can also consult a similar screen with upside capture alone.
The key here is understand what these captures represent, define an investment strategy and implement it.
To conclude,
Good returns imply good downside protection but does not guarantee low stess.
Good capture ratios + reasonable returns + reasonable downside protection maybe a way to get a bit of everything.
Please remember, if your screen has only 2/3 funds, you are expecting too much.
Do share your thoughts on how you would go about screening funds.
Resources
More about the downside capture and also the upside capture can be found in the following posts:
Simplify Mutual Fund Analysis with Upside/Downside Capture Ratios
Understanding Upside and Downside Capture ratios
How Mutual Fund Upside and Downside Capture Ratios are calculated.
A visual tool: Mutual Fund Downside Protection Consistency Analysis.
Individual funds can be analysed with Mutual Fund Downside Protection Calculator.
Download capture ratio data for Mid-cap funds (24th Mar. 2016). This will work in Google Sheets and in Mac Numbers and Mac Excel as well.
Download the capture ratio batch analyzer (requires Win Excel 2007 or above with Macros enabled)
We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Join our courses in exclusive Facebook Groups!
- 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
- Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content) in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
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)
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 correct 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 a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth 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 "goodbye" to your employer (Google Play Store)