This article presents results from the Equity Mutual Fund Screener Sep 2022 and discusses why we badly need an aggressive hybrid index fund! We find out how easy/hard it is to consistently beat the CRISIL Hybrid 35+65 – Aggressive Index. The index comprises S&P BSE 200 TR(65%) and CRISIL Composite Bond Fund Index (35%).
Disclaimer: Fund performance reports present return and risk analysis of a fund with representative benchmarks and not investment recommendations. It must be expressly understood that the data below reflect only past performance and is in no way an indication of future performance. Our investment recommendations are Handpicked List of Mutual Funds (PlumbLine).
We shall use two metrics for the analysis. 1 Rolling return outperformance consistency: the fund returns are compared with category benchmark returns over every possible 3Y,4Y, and 5Y period. Higher the outperformance consistency, the better. Suppose 876 fund returns were compared with 876 benchmark returns, and the fund has beaten the benchmark 675 times. The consistency score will be 675/876 ~ 77%.
2 Downside performance consistency over every possible 3Y,4Y, 5Y. Higher, the better. This is defined using the downside capture ratio and 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.
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A score of 50% means that 5 out of 10 times, the Fund performed better than the category benchmark when the benchmark was moving down. This is a measure of risk protection. It is computed from rolling downside capture data. Read more: An introduction to Downside and Upside Capture Ratios.
To qualify as a “consistent performer,” the fund should have a return outperformance consistency or a downside protection consistency of 70% or more.
- The total number of funds: 26
- The number of funds with rolling returns > 500: 21
- The number of funds with rolling return outperformance consistency greater than 70%: 6
- The number of funds with downside protection consistency greater than 70%: 1
- The total number of funds: 30
- The number of funds with rolling returns > 500: 23
- The number of funds with rolling return outperformance consistency greater than 70%: 6
- The number of funds with downside protection consistency greater than 70%: 1
That is quite a poor performance. This is why we feel an aggressive hybrid index fund is badly needed This would passively offer the so-called “free lunch” benefit of diversification (equity + bonds) at low cost and better performance than most actively managed funds in this category.
Free lunch means that by substituting 35% of stocks with bonds, we have reduced the risk but not the return (typically). This means asset allocation (or, in this case, an aggressive hybrid index) enables us to get a better risk-adjusted return (return obtained per unit risk taken). See: Aggressive Hybrid Funds vs Low Volatility Index Funds: Which is better?