Using MF returns data: the wrong ways

Whatsapp share
Tweet it out
Share on FB
Post on LinkedIn

Investors care about their MF returns. Naturally. They care about returns from their portfolio; they care about returns of the funds they are holding; and importantly, they make decisions about their portfolio by looking at returns data.

There are several ways to look at returns data, and not all of them are correct. And investors – novice to seasoned – often make mistakes in this regard. Many a time, they look at wrong data or look at right data and draw wrong conclusions.

MF Returns data

There is a popular website in US called It analyses data across politics, sports, and other social arenas to provide useful insights. They are particularly widely followed in US election years, such as this one. They have a segment called ‘Good use of polling or bad use of polling’, in which they look at data from opinion polls and judge whether people are interpreting it correctly.

Along those lines, let me list the ways in which investors look at returns data and identify ‘bad use of returns data’ and ‘good use of returns data’ or. I have split this into 2 articles.

This article (wrong ways)  is for investors who have been in the market for less than 5 years and are still learning how to interpret fund returns.

The second one on right ways (link at the end of this article), will be for both discerning investors as well as relatively new investors wanting to get the facts right when it comes to MF returns.

#1 MF returns of 1-3-5 year periods

And more specifically, the 1-year return. Using these returns to make decisions, to set return expectations, and to choose funds by going for the funds that score at the top of the charts will leave you with sub-par funds more often than not. Here’s the thing about the returns – they are the returns from one particular date to another, on a given day.

What you should be looking at is the consistency of the returns. If a fund is able to stay above average, i.e, in the top two quartiles across timeframes at different times, then it’s a good one and one that you can rely on

These returns:

  • Ignore what has happened in the market in the period between those two dates. Not much may have happened in 1 year. But take a 5-year period. Multicap funds’ latest 5-year return averages about 6%. Between 2015 and 2020, markets went through a strong upswing (2015-2017), a sliding 2018, a volatile 2019 and 2020. A fund would have navigated each of these phases in a different way, and knowing how it has pulled through these cycles is important.
  • Are influenced by what is happening either on the start date or the end date. This is a derivative of the point above – if, 5 years ago, equity markets were on an upswing and now they are in a correction, it is going to pull returns down. For multi-cap 5-year returns in 2019 at 11% were much higher than what they are today.
  • Change, and on a daily basis. This leads from the two points above. What the 1-year or 3-year returns are today will be very different from what they were yesterday and what they will be next week.

And for these reasons, you cannot use the 1-3-5 year returns alone to make an investment decision or set return expectations. HDFC Equity, at this time last year was in the top quartile on a 1, 3, and 5-year basis. Now, it is in the bottom quartile. So going by the ‘top’ fund in the charts today will be misleading.

What you should be looking at is the consistency of the returns. If a fund is able to stay above average, i.e, in the top two quartiles across timeframes at different times, then it’s a good one and one that you can rely on to deliver market-plus returns. And what returns would this be? Well, we’ve covered it here and here.

#2 Going by fund return without looking at the market

When looking at fund returns, you also need the context of what the market is doing.

If liquid funds returns are low today, it’s not because the funds are performing poorly. It is because interest rates are low. If your multicap equity fund’s 5-year SIP is 6.25% (the average IRR for multi-cap funds), markets have gone through two years of flat to volatile to falling returns. The Nifty 500’s SIP return is not very different at 6.39%.

Therefore, to either prevent yourself from worrying about low returns and exiting or being carried away by high returns and entering, first look at the market itself.

#3 Going by return without looking at nature of fund

This leads from the point above. While the returns are a factor of the market, they are also a factor of fund strategy and where it invests. Using the return numbers alone – even if you looked at consistency and all the other metrics discussed above – can still push you into incorrect decisions unless you understand the fund itself.

Consider gilt funds or dynamic bond funds. These funds have been steadily clocking double-digit 1-year returns for over a year now. Their 3-year and 5-year returns are also reasonably strong in the mid-to-high single digits. The interest rate cycle turning down and the resultant bond rallies have helped gains.

But both gilt and dynamic bond funds are extremely volatile by nature and can see losses even in 1-year periods, as bond prices react to changing interest rate dynamics. They therefore suit only the longer-term. If you did not understand this aspect, you may have invested for the wrong timeframe or you would be worried when returns fall.

Similarly, in equity, consider categories such as focused, multi-cap or large-and-midcap. The allocations towards mid-caps, large-caps, and small-caps will vary, influencing both return and risk.

#4 Looking at market return to time investments

Or, trying to use metrics such as PE ratio to time investments. Both market troughs and peaks are known only in hindsight. Markets may remain elevated for months on end before moving into correction zone. When a turnaround from a market fall happens, it can catch you equally unaware – the rapid rise in the past two months attests to that. So trying to time an entry or exit, or rebalancing your portfolio based on market moves is impractical. We’ve covered PE-based investing and market timing in detail in an earlier article.

The best thing you can do is to run a normal SIP, and use market falls to add equity exposure as explained in the linked article. Then, rebalance your portfolio based on how far it has deviated from your original allocation in order to book profits in the rallying asset class and redeploy into the under-valued asset. This is covered in our rebalancing article.

#5 Comparing lump sum and SIP return

It’s all a question of time. Say you’re looking at a 5-year return. If you made a lump-sum investment, that entire amount is invested at a single point and compounds over the full 5-year period. When you invest through an SIP, you have smaller amounts invested at different price points and working for different, and shorter, periods. When the timeframe covers a rising market, each SIP instalment would be at higher prices which takes average costs up and vice versa.

Therefore, the two cannot be directly compared. Lump-sum investing is all about getting the timing right in the medium term and will almost always work whatever be the timing of entry, for the very long term (say 20 years or more). A SIP is all about making disciplined investments to reach your goal. You can always top up an SIP with lump-sum investments on market falls to drive up returns.

Also read our article on – Using MF returns data – the right ways

Share via Whatsapp
Tweet it out
Share on FB
Post on LinkedIn

More like this

Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

2 thoughts on “Using MF returns data: the wrong ways”

Comments are closed.

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

The essence of PrimeInvestor

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

Legal Disclaimer : PrimeInvestor Financial Research Pvt Ltd (with brand name PrimeInvestor) is an independent research entity offering research services on personal finance products to customers. We are a SEBI registered Research Analyst (Registration: INH200008653). The content and reports generated by the entity does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information are provided on an ‘as is’ basis by PrimeInvestor Financial Research Pvt Ltd. Information herein is believed to be reliable but PrimeInvestor Financial Research Pvt Ltd does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. The services rendered by PrimeInvestor Financial Research Pvt Ltd are on a best-effort basis. PrimeInvestor Financial Research Pvt Ltd does not assure or guarantee the user any minimum or fixed returns. PrimeInvestor Financial Research Pvt Ltd or any of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates will not liable for any losses, cost of damage incurred consequent upon relying on investment information, research opinions or advice or any other material/information whatsoever on the web site, reports, mails or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Use of the above-said information is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this website, blog, and investment solutions are and shall remain with PrimeInvestor Financial Research Pvt Ltd. All material made available is meant for the user’s personal use and such user shall not resell, copy, or redistribute the newsletter or any part of it, or use it for any commercial purpose. PrimeInvestor Financial Research Pvt Ltd, or any of its officers, directors, employees, or subsidiaries have not received any compensation/ benefits whether monetary or in kind, from the AMC, company, government, bank or any other product manufacturer or third party, whose products are the subject of its research or investment information. The performance data quoted represents past performance and does not guarantee future results. Investing in financial products involves risk. Investments are subject to market risk. Please read all related documents carefully. As a condition to accessing the content and website of PrimeInvestor Financial Research Pvt Ltd, you agree to our Terms and Conditions of Use, available here. This service is not directed for access or use by anyone in a country, especially the USA, Canada or the European Union countries, where such use or access is unlawful or which may subject PrimeInvestor Financial Research Pvt Ltd or its affiliates to any registration or licensing requirement.

Aditya Birla Mutual Fund • Axis Mutual Fund  Baroda Mutual Fund BNP Paribas Mutual Fund • BOI AXA Mutual Funds Canara Robeco Mutual Fund • DSP Mutual Fund  • Edelweiss Mutual Fund
Essel Mutual FundFranklin Templeton Mutual FundHDFC Mutual FundHSBC Mutual FundICICI Mutual FundIDBI Mutual FundIDFC Mutual FundIIFL Mutual FundIndiabulls Mutual FundInvesco Mutual FundITI Mutual FundKotak Mahindra Mutual FundL&T Mutual FundLIC Mutual FundMahindra Mutual FundMirae Asset Mutual FundMotilal Oswal Mutual FundNippon India Mutual FundPGIM Mutual FundPPFAS Mutual FundQuant Mutual FundQuantum Mutual FundSahara Mutual FundSBI Mutual FundShriram Mutual FundSundaram Mutual FundTata Mutual FundsTaurus Mutual FundsUnion Mutual FundsUTI Mutual FundsYes Mutual Funds

Equity: Large Cap Funds | Mip Cap Funds | Large And Mid Cap Funds | Small Cap Mutual Funds | Contra Mutual Funds | Dividend Yield | Focused Mutual Funds | Find Top Index Funds | Best Sector Funds | Thematic Mutual Fund | Best Value Mutual Funds | Equity Linked Savings Scheme | Tax Saving Funds

Debt: Banking And PSU Funds | Corporate Bond Funds | Credit Risk Funds Mutual Funds | Dynamic Bond Funds | Floating Rate Funds | Gilt Mutual Funds India | Find Top Liquid Funds In India | Long term debt funds | Low Duration Funds Debt Funds | Medium Duration Debt Funds | Medium To Long Duration Funds | Money Market Debt Funds | Overnight Debt Funds | Short Duration Debt Funds | Ultra Short Term Debt Fund
Hybrid: Aggressive Hybrid Funds | Arbitrage Mutual Funds | Balanced Advantage Mutual Funds | Conservative Hybrid Funds | Dynamic Asset Allocation | Equity Saving Funds | Multi Asset Funds | Multi Asset Allocation
Mutual fund rolling returns by category: Balanced Advantage | Conservative Hybrid Fund | Corporate Bond | Dividend Yield | Dynamic Bond | Equity Linked Savings Scheme | Floating Rate | Index Funds | Large and Midcap fund | Large Cap Fund | Liquid funds | Low Duration | Mid Cap Fund | Multi Cap Fund | Short Duration | Small cap Fund | Solution Oriented – Childrens Fund | Ultra Short Duration

Login to your account