In our article “How safe are your investments with MFs in India?”, we explored how returns from majority of MFs don’t beat Index and also realized that when pitched against TRI format, success percentage of MFs further drops. For this article, we also studied how the heads rolled after being top performer based on one year rolling returns. Rolling returns are computed as follows.
- Rolling period 1 — January 2010 end to January 2011 end
- Rolling period 2 — February 2010 end to February 2011 end
- Rolling period 3 — March 2010 end to March 2011 end
- And so on for all possible trading days in each year.
Poor show by MFs in last 10 years.
Based on 1 year rolling returns till the end of each month since 2010, we listed the top 10 schemes each month. When we went through the data, we realized that out of 132 rolling periods, no scheme could figure in top 10 more than 50 times. 50 out of 132 months is less than 40%. This clearly established that today’s top performers are much less likely to be consistent out-performers in future.
We got to be unique in our approach.
At Vivekam, we built a system of ranking MF schemes with the sole objective of discovering the likely winners than going with point-to-point occasional winners. We wanted to build an objective approach that considers 1. Hidden value in portfolio held by schemes. 2. Past consistency in out-performance of Nifty and 3. Moderate volatility in such out-performance. Combining the weights earned by these factors, Vivekam arrives at the total score of each MF Scheme.
NAV and ENAV(Expected NAV).
Vivekam has the proven ability to assess the fair value of any well diversified portfolio and determine it’s price ranges based on working results of stocks in it. Vivekam determines the fair NAV of portfolios, announced my MFs at the end of each month, and sees if the declared NAV is under or over priced by comparing both. This comparison will help in ranking MF Schemes along with other two parameters. An illustrative graph of declared NAV Vs our fair NAV is given below.
The above picture shows ENAV and declared NAV of Axis Mid Cap fund from 2019 August to 2020 December months based on scheme’s declared portfolios at that point of time. Other things being equal, Vivekam prefers schemes with ENAV being higher than Scheme NAV and vice versa.
Strong and stable outperformance
Apart from gap between two NAVs outlined above, outperformance of MF over Nifty on rolling returns basis is computed. Also computed are the mean and volatility of such out performance. Using all these variables our proprietary model gives the weights to each MF Scheme. The scheme with maximum weight is considered to be more likely to out-perform Nifty. The statistical evidence built by Vivekam strongly supports this approach because of the following facts.
- Top schemes ranked 1 and 2 by Vivekam have beaten Nifty 93% of the times.
- These two schemes have shown an average out-performance of 3.41%, even if held for one year period over Nifty.
- Top ranked 5 schemes have beaten Nifty by an average of 84% times and delivered an average out-performance of 3.02% together if held for one year.
- There is no lock-in period for MF investments and if the MF rank slips significantly post acquisition, it can be replaced with better scheme based on higher rank.
- When we automated the process by dropping schemes falling below top 20 ranks to be replaced with top ranked MF, the returns were fabulous.
- In fact, returns from automated MF portfolios, after capital gains tax and exit load, if any, were ahead of Nifty in most occasions as shown in table 1 below.
- Going further, we checked the efficacy of our approach with Nifty TRI too. The returns were very favourable with 8 out of 11 periods earning more for clients.
After TAX returns to Investors.
Post tax returns earned from Vivekam’s model MF portfolio for periods starting in January 2010, January 2011 etc and held on till end of December 2020 were as follows. Please bear in mind that these returns are net to client after capital gains tax and after exit load, wherever applicable. Nifty returns too are after tax at 10% rate. All cells with green background have done better than Nifty on post-tax basis.
TABLE 1. Portfolio with only 2 Schemes, after Income tax
|Year||Auto Reblanced MF||NIFTY|
Comparison with Nifty TRI.
We also checked for Nifty TRI to see how this automated portfolio structure performed. Below is the table of values. 8 out of 11 times, returns offered by auto rebalanced MFs were higher.
|TABLE 2. Portfolio with only 2 Schemes Vs Nifty TRI, after Income tax|
|Year||Auto Reblanced MF||NIFTY TRI|
Direct plans make it even sweeter.
Direct plans have made their entry in recent past and hence we did not work on those variants. With much less expense ratio on direct plans, Vivekam’s clients are all set to smile their way to prosperity while enjoying total peace of mind in the entire journey of MF investments.
Risk Vs Return trade off
World over, analysts use Sharpe ratio to determine the desirability of an option over safe route. Sharpe ratio measures the likely return for every unit of risk undertaken in an alternative investment model. When we tested the results of auto rebalanced MFs with Nifty, the Sharpe ratio accorded a seal of approval for longer durations, as the data in the following table suggests. We tested the model on data from the beginning of 2010 to end of December 2020.
|Sharpe Ratio Statistics|
|No of Years||No of instances||Avg. Return from Auto rebalanced MFs||Avg. Nifty returns||Sharpe Ratio|
We all know equities reward handsomely over longer time frames. From the table above, though the average returns from Auto Rebalanced Mfs are higher than Nifty returns, Sharpe ratio is not too favourable for shorter durations. Unless the Sharpe ratio is more than 1, it implies the risk is more likely with Auto Rebalanced Mfs. As can be observed, the Sharpe ratio is significantly higher for longer durations indicating the supremacy of the model discussed above.
Verifiable claims and hand holding approach.
MF investments are subject to market risks but such market risks are handled very effectively through Vivekam’s approach which helps investors to be well grounded and still be able reach the skies. By ensuring that investors always hold best ranked schemes in their portfolios, better returns are a natural outcome. If you are intrigued by the claims of Vivekam, please feel free to visit our site www.vivekam.co.in or contact us at firstname.lastname@example.org . You are welcome to visit our office too, with prior appointment, to go over the whole process, in the company of our support staff, and be provided with answers to any queries you may have.