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Which mutual fund categories did the best in 2021

One way to look at mutual fund categories is to look at equity categories, debt categories and hybrid categories separately.

January 07, 2022 8:06 IST | India Infoline News Service
In any particular year, the best performing mutual fund categories give a picture of the underlying trend. One way to look at mutual fund categories is to look at equity categories, debt categories and hybrid categories separately. But that still does not help the ranking because even within equity and debt, funds are as diverse as cheese and chalk in terms of risk profile. The answer is to look at risk adjusted returns for a more meaningful view.

How we can look at risk-adjusted returns?

You can always get into complex areas of risk like standard deviation, variance and Beta, but they have either limited application or can be unnecessarily complex. An intuitively simple yet significant measure of risk is the range factor. Larger the range between the best performing fund and the worst performing fund in the category, greater is the risk.

We start off with the category-wise returns and then adjust the category average returns by the range risk factor. This gives us risk-adjusted returns for each category. What do we understand from risk adjusted returns. They have two implications. The first is whether the number is positive or negative. The second is how they rank internally within the category.

How equity fund categories ranked in 2021?

Firstly, performance outliers are best avoided. FMCG funds are too few and hence the range is small. So, risk-adjusted score looks amplified. In the case of Flexi-Cap, there has been a lot of churn between multi-caps and flexi-caps so some underperformance is understandable.
Equity Categories Category Average Top Performer Bottom Performer Risk Adj Score
Sector - FMCG                18.54                19.36                17.65      191.36
Dividend Yield                35.29                47.27                29.34         57.75
Contra                37.39                51.49                28.27         45.52
Large & Mid- Cap                37.19                48.15                24.99         40.13
Equity- Infrastructure                51.66                83.83                35.29         37.56
Small-Cap                61.25                90.99                28.40         27.79
Sector - Technology                59.79                69.97                21.72         26.91
Large-Cap                27.02                42.24                19.03         22.15
Mid-Cap                42.49                62.18                20.28         20.57
Value                35.30                63.87                22.87         19.69
Equity - ESG                31.37                65.38                21.34         15.20
Multi-Cap                40.49                66.37                16.57         13.47
Focused Fund                32.36                43.55                12.27         12.69
Sector - Healthcare                17.81                28.36                11.24         11.69
Sector - Financial Services                16.03                33.02                11.48           8.54
ELSS (Tax Savings)                32.31                74.10                12.75           6.71
Flexi Cap                31.87                48.28                 -2.17         -1.37
Data source: Morningstar

What is surprising is that in a highly volatile bull-year, dividend stocks turned out outright winners. Like last year, ELSS remains at the bottom due to the vast range of performances but healthcare was close to the bottom, unlike last year, when it was outperformed.

Interestingly small cap funds did quite well while IT funds continued to remain a good performer overall in 2021. In fact, small cap funds and large cap funds outperformed the respective indices even at a median level.

How Debt fund categories ranked in 2021?

It has been a tough year for debt funds as is evident from the average yields given by various debt fund categories. With central banks staying hawkish and bond yields moving up, the long duration funds typically came under pressure.
Debt Categories Category Average Top Performer Bottom Performer Risk Adj Score
Floating Rate 3.62 6.34 1.65           1.27
Money Market 3.54 5.07 0.69           0.56
Credit Risk 8.77 22.18 1.19           0.50
Medium to Long Duration 2.84 9.39 0.03           0.01
Liquid Funds 2.94 4.31 0.01           0.01
10 yr Government Bond 0.97 2.16 -0.03         -0.01
Dynamic Bond 3.32 49.97 -4.27         -0.26
Low Duration 3.73 11.59 -0.89         -0.27
Medium Duration 4.99 17.83 -1.06         -0.28
Short Duration 3.68 12.15 -1.01         -0.28
Long Duration 0.43 4.2 -11.99         -0.32
Government Bond 2.04 7.23 -2.34         -0.50
Corporate Bond 3.13 4.94 -1.22         -0.62
Banking & PSU 3.13 4.47 -15.42         -2.43
Data source: Morningstar

For a change, the floating rate funds emerged at the top of the list . Another surprising name in the top 3 was the Credit risk funds. These funds had been laggards in the last 2 years, faced with a spate of defaults. But, with the general health of Indian paper improving, the strategy of going down the rating curve appears to have worked in 2021.

If you look at the number of debt fund categories giving lower-end returns in the negative, it is clear that it has not been a very easy year for debt funds.

How Hybrid fund categories ranked in 2021?

Here again, we have a small problem with the outlier. With limited Balanced Allocation funds available in India, the risk-adjusted returns have got overstated, making it an outlier.
Hybrid Categories Category Average Top Performer Bottom Performer Risk Adj Score
Balanced Allocation                21.01                28.06                14.04         21.04
Aggressive Allocation                26.15                54.19                13.08           8.32
Equity Savings                12.88                20.03                   4.87           4.14
Dynamic Asset Allocation                14.49                27.65                   3.10           1.83
Arbitrage Fund                   3.83                   7.50                   2.00           1.39
Conservative Allocation                   9.98                21.75                   0.92           0.44
Data source: Morningstar

If you leave out the outlier of Balanced allocation funds, then aggressive allocation funds have done the best and conservation funds the worst. That is hardly surprising if you consider that the higher equity component helped the Aggressive Hybrid category.

What were the key takeaways from the category-wise fund performance in 2021? On the equity side, markets have placed a premium on dividend streams. That also provides a valuation support and these stocks have done extremely well. On the debt side, hawkish rates have hit the long duration funds the most, while floaters did the best.

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