Which fund categories did best in a volatile year?

22 Aug 2022 , 10:16 AM

The last one year from September 2021 to August 2022 has been volatile and challenging in more ways than one. After the Nifty and the Sensex peaked out in October last year the equity markets saw a sharp sell-off. Between October 2021 and June 2022, foreign portfolio investors sold $33 billion in equities and were net sellers in each of the nine months. In addition, global headwinds like rampant commodity inflation, Fed hawkishness, margin pressure on Indian companies, RBI rate hikes and fears of a global recession put pressure on the equity markets. In short, it has been a challenging last 12 months for equities.

However, it has not been too helpful for bonds either. Most debt funds faced pressure from rising bond yields, which rallied more than 150 basis points during the year. Also, fears of a recession raised the spectre of bond defaults. With equity and debt funds facing headwinds, hybrid funds were in no better position. Apart from equity and debt struggling, it became increasingly difficult for fund managers to use discretion in asset management. So, how do we look back and evaluate the mutual funds in the last one year?

We use Modified Risk Adjusted Returns (RAR)

In a volatile year, higher returns may come by sheer chance. In fact, it is very likely that higher returns in a volatile  year will come either through lady luck or by taking on more risk. Hence, risk-adjusted Returns (RAR) is the measure we use to evaluate the performance of different categories of mutual funds over the last one year. In any typical risk-adjusted returns, the average returns is divided by the variance in returns to arrive at RAR.

One can argue that just dividing returns with deviation may not give a precise picture, but then it gives an approximate picture, which is good enough. To factor in the extent of volatility, we use the range as a measure of variance rather than the standard deviation. Thus the average returns of the category is divided by the range of the best performer and the worst performer to arrive at the risk adjusted returns (RAR). Here is how it panned out.

How the equity funds fared in last 1 year on RAR

Let me begin with the caveat that if FMCG looks grand on the RAR measure, it is because only 1 FMCG fund of ICICI Prudential MF has been considered in this ranking. Hence the results and the extent of outperformance can be misleading. However, that is not to take away from the fact that FMCG has been a star performer in last 1 year. Other categories that performed well in terms of RAR were financial services, contra funds and infrastructure funds. Interestingly, in a volatile year, even dividend yield funds have done well.

Equity Fund Category	Category Average	Top Performer	Bottom Performer	Range	RAR
Sector — FMCG	22.94	23.85	21.96	1.89	12.1376
Sector – Financial Services	8.99	10.82	1.43	9.39	0.9574
Contra	11.77	20.59	6.72	13.87	0.8486
Equity- Infrastructure	14.44	30.02	3.96	26.06	0.5541
Dividend Yield	8.33	16.68	0.54	16.14	0.5161
Large-Cap	7.66	15.44	-0.25	15.69	0.4882
Value	7.50	17.50	0.03	17.47	0.4293
Multi-Cap	8.85	21.48	-2.08	23.56	0.3756
Small-Cap	9.68	23.80	-7.07	30.87	0.3136
ELSS (Tax Savings)	6.52	20.73	-1.90	22.63	0.2881
Mid-Cap	9.38	29.59	-6.42	36.01	0.2605
Large & Mid- Cap	8.17	30.94	-3.07	34.01	0.2402
Focused Fund	6.73	25.38	-2.82	28.20	0.2387
Flexi Cap	5.85	20.97	-11.76	32.73	0.1787
Equity – ESG	4.42	26.77	-2.41	29.18	0.1515
Sector – Technology	-7.01	-1.80	-9.67	7.87	-0.8907
Sector – Healthcare	-10.23	-6.01	-15.65	9.64	-1.0612

Data Source: Morningstar

Over the last one year, the worse performers in RAR terms were the two stars of the post COVID scenario viz. Technology funds and healthcare funds. While healthcare funds fund saw the gains of COVID relief slipping, technology funds were hit by higher attrition, higher manpower costs, rising travel costs and a consequent depletion in operating margins.

How the debt funds fared in last 1 year

There were some surprises in the debt fund rankings. In a rising yield scenario, you would expect the long duration and government bond funds to underperform. However, these 2 categories did well on the back of low volatility. There is not much of a surprise in money market funds doing well as they are low on interest risk and volatility too. Floating rate funds should have ideally gained in a rising interest scenario. However, the supply is limited, forcing most funds to use swaps for mirroring floating rate bonds, adding to costs.

Debt Fund Category	Category Average	Top Performer	Bottom Performer	Range	RAR
Long Duration	2.28	3.04	0.06	2.98	0.7651
Money Market	3.63	5.06	0.18	4.88	0.7439
Government Bond	2.16	3.77	0.06	3.71	0.5822
Floating Rate	3.01	4.77	-0.56	5.33	0.5647
Ultra-Short Duration	3.72	6.83	-0.07	6.90	0.5391
Corporate Bond	2.28	3.92	-3.50	7.42	0.3073
Low Duration	3.47	11.79	-0.02	11.81	0.2938
Banking & PSU	2.63	10.03	-1.96	11.99	0.2193
Short Duration	3.66	17.96	-1.48	19.44	0.1883
Medium to Long Duration	2.99	17.00	0.28	16.72	0.1788
Medium Duration	3.70	25.08	-0.34	25.42	0.1456
Dynamic Bond	3.24	19.39	-4.50	23.89	0.1356
Credit Risk	15.83	142.56	-0.06	142.62	0.1110
10 yr Government Bond	0.05	1.33	-1.16	2.49	0.0201

Data Source: Morningstar

Among the bottom performer was the 10 year government bond fund. Credit risk funds had high average returns but among the lowest RAR. The average returns on credit funds are distorted due to a single case of BOI AXA credit risk fund, which reported over 100% returns due to a low base after 50% write-off. That is not too credible and is obvious when  you look at RAR. Even dynamic bond funds lagged, as active and discretionary management hardly worked in this volatile market.

How the Hybrid funds fared in last 1 year

The story of non-discretionary allocation is back here also. Balanced allocation did best while all other categories involving discretion did not do too well.

Hybrid Fund Category	Category Average	Top Performer	Bottom Performer	Range	RAR
Balanced Allocation	6.05	8.31	3.86	4.45	1.3596
Equity Savings	4.48	10.06	-3.43	13.49	0.3321
Dynamic Asset Allocation	6.27	18.11	-3.49	21.60	0.2903
Aggressive Allocation	5.46	18.51	-4.79	23.30	0.2343
Conservative Allocation	5.77	22.32	-3.10	25.42	0.2270

Data Source: Morningstar

Due to the volatility in the equity and bond markets, both conservative allocation funds and aggressive allocation funds have lagged. A passive approach would have worked best in the midst of so much of market volatility in the equity and debt markets.

How the other funds fared in last 1 year

Interestingly, the fund category that performed best in RAR terms during last one year did not belong either to the equity category or the debt category. It is precious metals (gold funds) that were the star performers in the last one year. For simplicity, we will ignore the FMCG fund, being an outlier since only one fund has been included in the index.

Other Categories	Category Average	Top Performer	Bottom Performer	Range	RAR
Precious Metals	8.54	8.68	7.21	1.47	5.8095
Arbitrage Fund	3.38	5.02	0.13	4.89	0.6912
Liquid	3.34	6.01	0.00	6.01	0.5557

Data Source: Morningstar

Not only did gold funds manage to beat inflation, but also generated these attractive returns over the last one year with very low volatility. Not surprisingly, gold funds score the best among all mutual fund classes in last one year. After all, when the going gets tough at a macro level, it is only gold that holds your portfolio value!