Best and worst performing mutual fund categories

There are two aspects about fund performance viz. time period and risk. Here is how we have factored in both the aspects into our analysis.

Aug 18, 2020 07:08 IST India Infoline News Service

What are the best and worst performing mutual fund categories in India? That sounds like a fairly generic question because it does not talk about the period considered as well as it does not talk about risk. Let us factor in both these aspects and then look at the best and worst performing fund categories in India.

How to go about evaluating fund categories?

There are two aspects about fund performance viz. time period and risk. Here is how we have factored in both the aspects into our analysis. To give a proper time perspective of fund performance, we have considered 1 year representing the short term and 5 years to represent the long term. How do we factor in category risk? We have used range instead of standard deviation as it is simpler and more effective in a diverse data set. Based on the average category returns and the range of returns, a performance Score is assigned to each category, which is the ratio of the mean to the range.

Best and worst Equity Fund categories – 1 year period
Fund Category Mean Returns (%) Range of Returns (X) Risk Adjusted Score
Top 3 funds on risk adjusted score
Healthcare Funds 60.23% 22.02 273.52
Technology Funds 20.79% 16.69 124.57
Contra Funds 6.65% 6.35 104.72
Bottom 3 funds on risk adjusted score
Financial Services Funds (-15.54%) 15.17 (-102.44)
Infrastructure Fund (-6.6%) 40.13 (-16.45)
Value Funds 1.15% 16.26 (7.07)
Data Source: Morningstar Research

This is something you would have known even intuitively but pharma funds have been the star performers in the last 1 year followed by technology funds. Both benefited from a sharp rally post Mar-20 and also because all funds in the category have done very well due to an all round rally in these stocks.

Most banks and financials took a big hit on the back of the pandemic exposing the financial stocks to potential surge in NPAs in the post-COVID syndrome. That was evident in the returns. With projects stalled, infrastructure funds were the other big value destroyers in the last one year.

Best and worst Debt Fund categories – 1 year period
Fund Category Mean Returns (%) Range of Returns (X) Risk Adjusted Score
Top 3 funds on risk adjusted score
Long Duration Funds 11.56% 1.34 862.69
10-Year G-Sec Funds 11.91% 2.04 583.82
Floating Rate Funds 9.52% 4.23 225.06
Bottom 3 funds on risk adjusted score
Other Bond Funds (-3.68%) 12.24 (-30.07)
Credit Risk Funds (-0.10%) 57.98 (-0.17)
Medium Duration Funds 3.05% 53.13 5.74
Data Source: Morningstar Research

Here again the debt fund winners were surely known intuitively. Due to a 115 bps cut in repo rates the long duration funds and G-Sec funds did best. Floating rate funds benefited from RBI’s Operation Twist.

The bottom of the pack was the credit risk names. In these cases, not only were category returns negative but the range of returns was also huge creating a massive element of fund selection risk. These funds also saw volatility due to consistent outflows.

Best and worst Equity Fund categories – 5 year period
Fund Category Mean Returns (%) Range of Returns (X) Risk Adjusted Score
Top 3 funds on risk adjusted score
Technology Funds 12.11% 3.35 361.49
Consumption Funds 8.99% 4.35 206.67
Index Funds 6.61% 4.26 155.16
Bottom 3 funds on risk adjusted score
Infrastructure Funds 1.48% 13.63 10.86
Global Funds 8.66% 23.04 37.59
Other Equity Funds 5.13% 12.98 39.52
Data Source: Morningstar Research

Clearly, technology and consumption have been de-risked long-term themes. The fact that index funds are among the top performing funds only goes to show that passive approach worked better than active over last 5 years.

Infrastructure funds have been reeling due to debt of infra companies and limited project visibility in the last five years. Ironically, global funds have given decent CAGR returns but the high volatility makes them highly unpredictable as an investment option for long run.
 
Best and worst Debt Fund categories – 5 year period
Fund Category Mean Returns (%) Range of Returns (X) Risk Adjusted Score
Top 3 funds on risk adjusted score
10-Year G-Sec Funds 10.83% 1.81 598.34
Floating Rate Funds 8.30% 1.65 503.03
Banking & PSU Funds 8.84% 2.68 329.85
Bottom 3 funds on risk adjusted score
Credit Risk Funds 4.84% 26.93 17.97
Low Duration Funds 6.62% 11.01 60.13
Medium Duration Funds 7.34% 10.76 68.22
Data Source: Morningstar Research

G-Sec Funds have done extremely well over the last five years due to subdued interest rate scenario and low volatility in performance. Surprisingly, floating rate funds have done well as yield volatility appears to have worked in their favour.
Credit risk continues to be the big issue even if you look back at the last five years. Over a five year period, the one factor that differentiates the winners from the losers in debt funds is the category volatility due to a handful of traders taking bad trades. That is what should really matter to you as an investor.

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