Using Franklin Blue Chip & Franklin Prima Funds To Understand Risk vs Reward

Published: June 28, 2017 at 11:24 am

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Here are some examples of the risk and reward associated with equity mutual fund investing using the twenty year NAV history of Franklin Blue Chip Fund (a large cap fund) and Franklin India Prima Fund (mid, small-cap funds). I had compared these funds a few years back, but I think a re-visit will not hurt.

NAV data from 17th Dec 1993 and 23rd June 2017 was considered to compute rolling returns. In this interval, almost 800 20-year return computations are possible. Each blue dot and red dot in the picture below is a 20-year return.

Now, what I should I look at in this graph?

  • Shall I notice that Franklin Prima has pretty much always beat Franklin Blue Chip for all the 20-year interval considered and shift my equity portfolio to entirely mid/small-cap funds?
  • Or shall notice that all red and blue dots are above 15% and expect the same kind of return over the next 20 years?
  • Or should I look at the horizontal axis and realise, even though each fund has ~800+ 20Y returns data, the investment window is only from late 1993 to late 1997 – a mere five-year window. Is this enough data?

Now let us invert the stats: make the rolling return duration as 5 years and the investment window as 20 years. This produces a whopping ~4600 entries for each fund.

  • Should I now look at the increase in the spread of returns?  What was only ~5% for each fund over 20Y, has not become ~60-70% for each fund. The best quality about a rolling returns graph is its ability to display risk even though only returns are plotted.
  • There are those in the mutual fund industry who consider 2-3Y as “long-term”. If 5Y long-term? Do mutual funds beat 5Y fixed deposits or even savings bank accounts at all times?

What about 10Y rolling returns?

  • Can I now look at these 3200+ 10Y returns and assume that I can expect at least 10% in the next 10 years?
  • Can anything be inferred from the spread of about 30% for the large cap fund and about 40% for the mid-cap fund?

At this point, some of you maybe going, “there is a selection bias here”. Of there is a selection bias because not many actively managed funds have that long a history in India. I could repeat this with large and mid-cap indices. I can assure you that the results would be a lot more depressing.

Let us complete the rainbow with 15Y rolling data.

What return can I expect over 5Y, 10Y,15Y or 20Y from equity?

More importantly:

How exposure to equity should I have over 5Y, 10Y, 15Y or 20Y investment tenures?

If you wish to use the Excel file use to generate the above graphs,leave a comment.


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