These 9 mutual fund schemes have 0% loss rate across various time periods
Durable funds witness very few instances of negative returns across different time frames.
Most equity mutual funds have performed poorly over the past one year period, with some mid-cap and small-cap funds posting negative SIP returns. However, it has been proved and accepted that no other asset class has the ability to beat equities in the long run and therefore, avoiding equity-based investment options is not a good strategy at present. As the government and RBI take measures to revive the economy, the upcoming festive season has created hopes of a demand revival.
The recent short-term underperformance is overshadowing the long-term benefits of mutual funds. The good quality funds are likely to bounce back as the economy revives and the global macro factors settle down. However, not all mutual funds are good performers and some of them fail to perform as per their defined objectives. Therefore, it is important to evaluate the funds’ performance from time to time. In the current scenario, how can one identify good quality equity funds? One way is by looking at the historical loss rate across time frames. Historical loss rate is defined in terms of the fund returns and it is calculated by dividing the number of years in which the fund has delivered negative returns by the total number of investment years.
We studied 392 standard schemes with growth options of different categories of equity funds including equity diversified funds, contra funds, dividend yield funds, ELSS, thematic funds and sector funds. NAV data for each of the funds in the above categories were extracted from the year 2012 onwards using ACE MF database. NAVs for the first and last trading day of each year (2012-2018) were used for the analysis. For 2019, the latest NAV considered was for last trading day of August 2019, that is 30 August. The returns for each of the funds included in the sample were worked out for every 2 years, 3 years, 4 years and 5 years time period.
For example, 2-year returns were worked out using NAVs of 1 January 2012 and 31 December 2013, 1 January 2013 and 31 December 2014 and ends at 1 January 2018 and 30 Aug 2019. Similarly, the five year return period includes 2012-2016, 2013-2017 and ends at 1 January 2015- 30 August 2019. Looking at the historical loss rate for three years, an investor entering at the beginning of the year and exiting at the end of the year would have got six attempts since 2012. A fund named PGIM India Euro Equity fund has delivered negative returns in two such attempts, which leads to a loss rate of 33.3% (2 divided by 6).
Only those funds were filtered out whose loss rate was 0% across the above defined multiple time frames. In such funds, an investor would have never lost money if invested in the defined manner and across any of the given time scales. Moreover, those funds with Value Research ratings of 4-star and above and with corpus greater than Rs 150 crore (for the month of July 2019) were only included. Only nine funds passed these filters comprehensively. Out of these nine funds, six are equity diversified funds, two are ELSS and one is a contra fund.
Historical loss rate a good indicator of performance
These funds have outperformed benchmarks over 3 and 5-years.
Returns as on 9 September 2019. Corpus as on 31 July 2019. Data sorted on fund ratings. Source: ACE MF
All of these funds have outperformed their benchmarks in the past 3 and 5-year time frames. Although, in the last one year, all nine funds have delivered negative returns, but eight have outperformed their benchmarks. In other words, the eight funds have lost less than their benchmark indices in the past one year.
In terms of the AUM growth between July 2018 and July 2019, the total assets of these funds grew 18.8% year on year, relative to 5.9% growth in the total industry AUM. The shortlisted funds have also scored well on the risk adjusted measures as all of these funds have delivered positive Sharpe and Treynor ratios in the last 3 and 5 years. Sharpe ratio measures the excess returns (relative to the risk free rate) of a fund compared to its standard deviation, which is a measure of total risk (market plus company specific). On the other hand, Treynor ratio measures the excess returns of a fund relative to its beta, which is a measure of the market or systematic risk.
Looking at the sector break-up for the month of July 2019, private sector banks have the highest exposure with ICICI Bank, HDFC Bank and Kotak Mahindra Bank among top held stocks. Following private banks, IT and refineries sectors are among the top five sectors for majority of the shortlisted funds.