These Eight Large and Midcap Mutual Funds are consistent outperformers

These eight large and midcap mutual funds have consistently outperformed the Nifty Largemidcap 250 TRI over every possible three, four and five-year windows since 1st Jan 2013.

The analysis was carried out with 24 large and midcap mutual funds and the shortlist was done using the Equity Mutual Fund Performance Screener September 2020. Readers must not consider this as a shortlist for investing and should exercise due diligence of the history of each fund taking into account their personal requirements.

How the funds were selected: We consider every possible 3,4 and 5-year investment windows bet 1st Jan 2013 and Sep 8th 2020. We shall define a, return outperformance consistency = no of times fund beat index/tot no returns. For example, say we have a hundred 4-year return data points and a fund got a return higher than the index in 73 of those instances. Then the four-year return outperformance consistency = 73/100 = 73%.

The following eight large and midcap mutual funds had a three, four and five-year return outperformance consistently greater than 70% with respect to the Nifty Largemidcap 250 TRI. Due to SEBI regulations, scheme mandates may have changed in the recent past. This has not been factored in the calculations.

Readers may wonder why this index was used instead of the more common Nifty 200 TRI which includes 100 large cap and 100 midcap stocks. The answer lies in concentration risk due to market cap weighting. The Nifty 200 has, as per the latest factsheet, 10.52% of RIL, 7.71% of HDFC Bank and 5.43% of Infosys. Read more: Do index fund returns depend upon just a few stocks (Concentration risk)?

In contrast, the Nifty Largemidcap 250 has only 5.93%, 4.36% and 3.06% of the above stocks respectively. This is because the aggregate weight of the 100 large cap stocks and 150 midcap stocks are capped at 50% each. Over longer durations, this is a tougher benchmark to beat than the Nifty 200.

Eight Consistent Large and Midcap Mutual Funds

These are the eight funds with more than 70% return outperformance consistency.

We can define a downside protection consistency using the downside capture ratio. This measures how much of a benchmark’s monthly losses (if monthly return < 0) a fund captures. A downside of 80% means a fund has captured only 80% of the index losses. Read more: Do active mutual funds offer downside protection? Or is it a myth?

Downside protection consistency is defined as the number of investment periods for which the fund fell less than the index (suffered lower losses) divided by the total no of periods. This is computed for every possible 3,4 and 5-year windows.

The exact opposite metric is the upside protection consistency defined as the number of investment periods for which the fund returned more than the index (experienced greater gains) divided by the total no of periods. The nature of the fund can be revealed by inspecting both up and downside protection consistency.

Take, for example, Canara Robeco Emerging Equities. As can be seen from the below table, the fund is an upside performer (moves up more than then index) rather than a downside protector (falls lesser than the index).

On the other hand, Invesco India Growth Opportunities Fund is more of a downside protector than an upside performer.

Sometimes (for the period under consideration), funds can do neither with distinction, for example, DSP Equity Opportunities Fund. Or they can do both with distinction, for example, Mirae Asset Emerging Bluechip Fund and some funds cannot be categorized.

If use our ‘usual’ filter of more than 70% return outperformance consistency and more than 70% downside protection consistency is applied we have a surprising list!

On the other hand, if we demand more than 70% return outperformance consistency and more than 70% upside performance consistency, we get these three funds.

The full data is available in the screener linked above. Finally, investors should keep in mind, no matter how we screen, the list could change from month to month!

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