Mutual Fund offering – why our’s is the best?

The main goal of mutual fund investors, like in any investment, is to seek appreciation of their investments. Once they are reasonably sure of significant appreciation, they rarely care about the choice of funds. Vivekam’s entire exercise is meant to derive an outperformance over nifty for all its investors irrespective of whether their investments are in lump sum mode or SIP mode. For the sake of clarity, let us handle lump sum investments and SIP investments separately.

Lump sum investments:

Vast majority of mutual fund investors choose to pick up the market winners (funds that have excelled in performance till that period of time) for their investments. Most mutual fund distributors also are seen to be advising their clients to go by this process. It is a known fact that top performer names are rolling over a period of time indicating that today’s top performers may not continue to be top performers in the following months. This simple fact disproves the premise that winners stay winners all the time.

Instead of following the herd behaviour of mutual fund investors in general, Vivekam has come out with 100% objective model to assign ranks to mutual fund schemes and arrange them in descending order on any given day. Vivekam’s unique model of assigning a fair net assets value to schemes and comparing them with real net assets value makes it distinct from the rest. In addition to this comparison, Vivekam also measures the rolling outperformance over nifty, volatility of such outperformance to come up with a numeric value of ranks. The efficacy of this approach is exceptionally outstanding by being able to outperform nifty on 98.12% of the possible trading days during the period 2013 to 2017, if the investment remained intact throughout the year. The following table presents the statistics relevant to this period. Since a period of one year is required to overcome short-term capital gains tax, data up to end of January 2017 only was considered.

Vivekam’s user interface can clearly demonstrate the top 10 schemes recommended on any day in the past and show how the average of the top 10 schemes managed to outperform nifty in next one year time. For the clients willing to do it by themselves, this process will help them shortlist and invest in better schemes on any given day.

Though the identification of better schemes is clearly established by the above process, it is a known fact that the returns could be further optimised if schemes that turned week after investments are replaced with better schemes in time. This process is called rebalancing by Vivekam.

Rebalancing of mutual fund portfolio:

In order to ensure a mutual fund portfolio remains healthy all the time, Vivekam strongly recommends investors to opt for rebalancing. In this process, Vivekam ensures that clients will never be required to pay short-term capital gains while making sure that their portfolio will only have better schemes. In this process, Vivekam flags any scheme that slips to a rank lower than 20 for deletion. However to avoid incidence of short-term capital gains tax, if such scheme for that particular client at that particular period of time is likely to result in a profit and thereby short-term capital gains tax, it will not be disturbed. In the following month or in the same month, if another scheme flagged for similar reasons is resulting in a loss, both these schemes will be sold and the proceeds will be invested in the top-ranked schemes for that month. To achieve this, Vivekam tracks every client’s individual investments into schemes and checks the duration for which it was held before moving ahead with rebalancing.

Vivekam has captured the results of this rebalancing process for all portfolios starting from 2013 onwards and is pleased to inform that the relative outperformance of the portfolios over nifty has been outstanding. The following table showcases the essence of rebalancing exercise which guarantees that there will never be short-term capital gains tax payable by investors and at the same time earns a reasonably higher CAGR over Nifty.

Conventional wisdom Vs Vivekam Model:

Apart from comparing with Nifty, we also wanted to check the efficacy of automated rebalancing model with buy and hold approach being preached market analysts. To test this case, we have shortlisted top leading 30 mutual funds and created 100 random portfolios consisting of 5 schemes each. We tested the hypothesis of holding on to them from each possible trading day to end of December 2017. It means, there could be about 241 days (of 100 portfolio each day) in 2009 that were built and held on till 31^st December 2017. Like that we ran the test till 2014 to make sure there was a minimum holding period of 3 years.

Following two tables show how they performed. First table shows average return, highest return and lowest return earned by random portfolios over this long period. Second table shows the performance of Vivekam’s automated rebalancing model with average, highest and lowest returns. By closely looking at the tables, one will notice that the average returns from Vivekam’s model are higher by around 1% CAGR per year. However, when we take a close look at the lowest return from both alternatives, the lowest earned by Vivekam’s model has always been higher by about 4% CAGR per year. Though the highest return in random portfolios appears higher than Vivekam’s logic, one must appreciate that there were 100 cases per day being compared with just one case per day in case of Vivekam. It is certainly not prudent for investors to believe in their luck, when they park their hard earned money.

SIP model of investments:

Traditionally, investors identify a fund and continue their monthly investments for a defined period without realising or caring for the positioning of the scheme and its ongoing performance. This is done under a presumption that the funds ought to do well in the long run. Compared to this, Vivekam comes up with SIP model that allows investors to pick the top likely performers every month as against investing in the same schemes. Further, Vivekam tracks investors’ investment into each scheme by installments and the date on which investment was made to track the incidence of short-term capital gains tax, in the event of required switch between funds.

In SIP model of investments, Vivekam helps investors take good schemes and stay invested in good schemes all the time while ensuring the exit of schemes that have turned poor, post investments. This process has helped several investors earn a higher return than nifty at all times. In our back tested data too the outperformance has been significant. The table below showcases how Vivekam’s SIP model outperformed Nifty in SIP model too.

Vivekam’s SIP model has performed very well compared to Nifty SIP model if the SIPs started from any year beginning from 2009 onwards, as displayed in the table above. Picking the ideal funds every month and retaining only good funds in the portfolio helped Vivekam trounce Nifty SIP by a decent margin. We also attempted to check how Vivekam’s SIP model compared with random portfolios of top MFs over the same period. Table below gives statistics pertaining to the comparison between random MF SIP and Vivekam’s SIP model. For the table, we shortlisted the top 30 MF by AUM and built 100 random portfolios comprising of 5 Schemes each. Then we ran a test assuming that portfolios started on all possible trading days with one SIP in each month in each selected scheme in portfolio. We compared the results at the end of 2017, assuming that investors trusted the SIP route with same schemes throughout.

Vivekam’s SIP model which includes automatic rebalancing, based on need, every month ensures that there will never be any capital gains tax at the hands of investor. System tracks each and every investment of investor in every scheme and reckons the investment date for computing short term capital gains. Looking at averages may not always be the right strategy given the factor of luck playing with investments. To handle this we also tested the strength of Vivekam’s model produced Minimum possible return with that of conventional model. The following table provides values thus derived.

From the values shown above, it can be easily established that the least possible returns for the most unlucky investor will be far better with Vivekam’s model compared to Conventional model. With average returns being high and minimum returns higher, Vivekam’s model appears most ideal for retail investors.

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