Using MF returns data: the right ways

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Our earlier article on using data looked at some of the wrong ways that investors tend to interpret mutual fund returns. In this one, we’re talking about areas where you are getting it right. Plus, a little more into how you can do better and go a few steps further.

#1 Comparing mutual fund returns with other funds

Among the many queries and responses we get, one that features quite frequently is why we have one fund recommended when another is doing well, or whether you can move from one fund to another that’s doing better. And that’s a great way to look at returns because a fund that’s able to beat both market and peers is a good one to have. In our analysis and ratings, comparing against its category is among the metrics we use.

But how you make such comparisons is the key.

  • One, compare with the right peers. Unless the funds are similar by nature, comparisons will lead you to incorrect conclusions. For example, you could look at – say, DSP Strategic Bond’s 15.4% 1-year returns now and see that against Kotak Corporate Bond’s 10.2% and wonder if you should move to the better fund. But the DSP fund is dynamic and currently has a duration strategy to gain from yield rallies, while the Kotak fund is more of an accrual fund with limited room for such price gains.
  • Two, know what in the fund’s strategy is causing it to move ahead. If it is a focused fund, for example, it could be a few stocks rallying that is driving returns. Cash calls in some equity funds could help in a volatile market. JM Large-cap, for example, has better 1-year returns than even Axis Bluechip. But that’s because the fund has gone up to 30% in debt over the past 12 months.
  • Three, don’t be short-term. Don’t look at 1-month returns or even 3-6 month returns and conclude that one fund is declining while the other is improving. Short-term returns have more to do with market dynamics than underlying fund strategies going wrong.
  • Four, look for consistency in the trend. An otherwise good fund falling behind its peers for a short while is nothing to worry about nor one on which you should act. Likewise, unless a fund has steadily pulled ahead of its peers and stays there, it may not be a good opportunity. The JM fund from above, for instance, beats peers less than 30% of the time when rolling 1-year returns since 2016. (Update: You can find rolling returns of many funds here in our rolling returns tool)

Compare mutual fund returns where the funds are similar. Look for consistency in the trend and look beyond the short-term period.

#2 Understanding poor performance drags your portfolio

A good part of queries we answer are when you use our MF Review Tool to identify what to do with your underperforming funds. You recognise and acknowledge underperformance but when to take action appears to be the challenge for you. (We have covered portfolio review in depth already).

When the fund’s share in your overall portfolio is low, whether you move out on not is not very material – though it is prudent to simply clean up, taxes or not.

But in other cases, where your underperforming fund accounts for say 20% or more of your portfolio, we see many of you being averse to making changes despite knowing that your fund isn’t doing much for your portfolio. While it is important to know the ‘why’ of underperformance in such cases, not acting can be double whammy. One, you are sitting with an underperformer. Two, it is concentrated and is therefore going to pull down your entire portfolio if it does not revive. And in the case of debt, such concentration may also spell capital risk.

Looking at the nature or the characteristics of a fund’s returns gives you a better understanding of a fund.

#3 Looking at metrics like standard deviation and Sharpe

These are metrics that measure how volatile a fund’s returns are and how well it delivers over the risk-free rate. We have had many of you asking us how funds and indices compare on their Sharpe ratios. All good! Looking at the nature or the characteristics of a fund’s returns gives you a better understanding of a fund.

When using metrics such as these, as well as others such as alpha, Sortino and information ratio, know the following:

  • There is no simple thumb rule to apply. It depends on the category itself – most accrual-based debt funds, for example, have high Sharpe ratios as their return deviations are low while dynamic bond funds could have lower Sharpe figures. For small-cap equity funds, a prolonged correction can send their returns lower than the risk-free rate which makes the Sharpe an irrelevant metric at times.
  • Don’t look at these metrics in isolation. A high standard deviation, while indicating that the fund is volatile, is not a deterrent if its long-term margin of outperformance and consistency in outperformance is strong. Mirae Asset India Large Cap, for instance, has a higher than average standard deviation, but is yet among the most consistent large-cap funds.
  • Stick to one source for information on these return ratios. That’s because these ratios use returns over a time period and at a particular frequency. Between providers, the time periods and frequency used in calculating the ratios will vary.

Fund performance and market performance always throw up trends. In March this year, for example, we had several queries on returns of liquid funds slipping sharply while those of ultra-short and similar very short-duration funds turned more volatile. Noticing such movements and trying to understand the reasons for it is important because it allows you to take action on your portfolio if needed. The credit crisis sparked many of you into analysing your own fund to check whether it had more risk than you could take.

However, not all trends are actionable. Trying to catch every trend can lead to frequent changes in your portfolio or lead you to invest in funds that you don’t understand. For example, pharma funds rallying sharply catches your attention – and you therefore invest in these funds or look for equity funds that have pharma exposure. That is not always the best idea. Similarly, you may want to make allocations to US funds expecting the current strong returns to sustain. But these funds are best used as diversifiers – i.e., allocations should be limited – and for long-term portfolios only, given that it is still equity.

Not all trends are actionable. Trying to catch every trend can lead to frequent changes in your portfolio or lead you to invest in funds that you don’t understand.

#5 Comparing with other options that offer better returns

Many of you ask us about alternative options to invest in, especially when they appear to offer better return opportunities. This is a good practice. We would urge you to be open to exploring new regulated products that suit you and help diversify your portfolio away from only mutual funds. At PrimeInvestor too, our ready to use portfolios use a mix of products to ensure your risk-return is optimal.

However, it is equally important to compare the right set of products. For example, the 10-year Bharat Bond ETF cannot be compared with banking & PSU debt funds. Although both are of high credit quality, the average maturity of both these are very different and hence the yield movements will vastly vary,. Similarly, comparing a direct Tier 1 bond offered by a bank to, say, a bond fund is also not great comparison. It is like comparing a single stock return to a portfolio of stock in mutual funds. Hence, in your search for new products, make sure your compare them right.

So, having got this far – you now know what you’re doing right when looking at mutual fund returns and where you need to change. There are other data points, apart from returns, where you may be doing a similar mix of right and wrong interpretations. That’s for another day!

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12 thoughts on “Using MF returns data: the right ways”

  1. Hey Bhavana,
    Thanks for the great article, super useful. Liking all the services so far.

    I’ve a query regarding the buy/sell calls. In one of the other comments you wrote “Funds moving from buy to hold to sell or sell to hold or any other combination depends on its performance and the market scenario”.

    Will you be taking the call just based on current performance? The fund can be having good stocks but it might be experiencing a temporary down performance. Wouldn’t it be better to hold the fund since the fundamentals are good?


    1. Hello sir,

      The calls we make are based on performance over different periods as well as markets and the fund strategy itself. We will be looking at current performance, obviously, but it is more in context of where performance has been leading up to it. We do take a longer-term view of performance especially where a fund’s strategy is sound. But we may still give holds or sells where the underperformance is just too long or too steep and avoid being overly influenced by past performance – the opportunity loss in such cases simply is too stark to ignore, and we have seen that funds can fall and never recover to their glory days. So its always a balance between current performance, performance in earlier times and market/rate cycles, strategy, market scenario. Hope this explanation gives you a better idea of how we approach calls in the review tool.


    1. Hello sir,

      Funds moving from buy to hold to sell or sell to hold or any other combination depends on its performance and the market scenario. For example, poor performing funds can undergo a change in investment strategy which can help them turn around. Or, a good fund can see several stock calls go wrong, which can make recovery very delayed and this will be a reason to move it to either hold or a sell. A fund could see higher risk which can cause it to either move to hold or sell. These are just examples – the reasons for changing calls can be many.


  2. ICICI mf ka banking and financial services fund kaisa hai. Axis mf ka multicap fund kaisa fund hai

    1. Hello sir,

      You can use our MF Review Tool, where we give buy/sell/hold calls on mutual funds. You can sign up for a free 14-day trial to use the tool or subscribe to our service for full-time access.


  3. Very well written article Bhavana, both the parts were short, to-the-point and in a very good flow.

    The line that hit me really hard was “Stick to one source for information on these return ratios” – this is a highly ignored part for DIY investors who do some actual research before investing.

    I have a query related to the points discussed – (a) you talked about point-to-point returns (commonly called 1-3-5 year returns on lump-sum) versus the rolling returns. Wouldn’t the actual SIP returns be very different from both? How useful is analyzing the (past) SIP returns of fund versus the rolling returns while selecting a fund for SIP investment? (b) if there are two good funds to choose from for SIP having comparable quality, would the fund with a higher Standard Deviation may end up giving a better SIP return since it may give better averaging opportunities over a period of time?


    1. Hello sir,

      Thanks! To answer your queries:
      1. SIP returns will be very different from point-to-point returns. You don’t use SIP returns to analyse a fund. Rolling returns tells you the quality and consistency of a fund’s returns, and that’s what is important. Rolling return is not just the average of a set of returns – it also says how often the fund beats the market, peers etc. Based on rolling returns (plus other metrics, of course), you know if a fund is a good one that’s capable of delivering and worth investing in. Whether you invest through SIP or lump-sum is entirely a matter of preference.
      2. Yes, a fund that’s more volatile will theoretically provide more averaging opportunities. But that’s not good enough a reason to prefer volatile funds over stable funds. One, the main question is whether the fund is good or not. If a less volatile fund beats the more volatile fund, then you should go for the less volatile one, because that’s where your returns are going to be better. Two, the difference in averaging opportunities between a more or less volatile fund is likely to be minimal. Three, averaging depends more on the market itself rather than the fund in specific – if the market is generally trending higher, then both the volatile and stable fund are going to be also trending up (assuming both are consistent performers), leaving limited averaging opportunities.

      The point I’m trying to make is this – a fund is a quality one when it has a clear strategy that has allowed it to perform better than average (category) and the benchmark over different cycles. As long as it is a quality fund, you invest in it. You cannot have a fund that’s good on SIP and not on lump-sum or vice versa. SIP is first and foremost a method of investing.

      Sorry for the delayed response 🙂


  4. Good Morning Madam,
    I feel for a layman index funds are better option where is less expense ratio & some funds has exit load up to 15 days which is a win win situation for a retail investors when they invest through Direct plan they can save the cost because all large cap funds have high expense ratio than index funds & exit load one percent & if the fund manager takes a wrong call on few stocks the fund may underperfom longer period what is your views.
    With Warm Regards

    1. Hello sir,

      Apologies for the delayed response. True, if you do not want the bother of identifying different funds, then you can stick with index funds. At this point, we have index funds across market caps that can help build a diversified portfolio.

      However, there are plenty of opportunities where active funds still do beat the indices – like several multi-caps, large-and-mid cap funds, mid-cap funds and small-cap funds. You can read this article to understand more. It’s primarily in large-cap funds where the index is the clear winner. And you do have services such as ours to tell you where to invest and do all the research for you 🙂


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