*Overall Rating based on the Fund’s Ranking within its Category
Why is the current fixation of Alpha not good enough for taking decisions?
Alpha is the difference between the returns earned by a Fund and its Benchmark Index over a given period. Mutual Fund Distributors (MFDs) and media refer to the Alpha i.e. Fund Returns over its Benchmark, for past 1Y, 3Y, 5Y, 7Y. However, their end-point is the current price which may be elevated or subdued. So, if a Fund has been performing good in recent times, its past Returns for various periods will always look good, and vice versa. The Alpha doesn’t give a true & complete picture, and therefore, it’s not good enough to look at only Alpha for taking decisions.
The correct method to identify a Sahi Fund is to look at Alpha over a period, but with different start dates. It’s called Rolling Alpha. Rolling Alpha helps analyse Fund Returns over Benchmark across cycles for period of 1Y, 3Y, 5Y and 7Y irrespective of start and end date. This helps you identify long-term & consistently performing Funds. Alongwith the Rolling Alpha, you must also look at Implied Investor Returns while assessing Sahi Funds.
What is the Benchmark?
Benchmark is typically a popular, market-wide index (e.g. S&P BSE 200) that reflects general market’s performance or particular part of the market. A Fund chooses a Benchmark based on the part of the market it wishes to invest in. It is expected that a Fund should earn more than its benchmark returns over 3-5 years.
How should one decide if the Fund Returns are good?
Fund Returns is the returns generated by the Fund over a given period. If the Fund Returns are higher than Benchmark Returns in a year, it is colour-coded as green or else it’s red for that year. If the Benchmark Returns are negative, but Fund Returns are less negative (i.e. higher than the Benchmark Returns), it is still considered as better performance, hence, marked as green. While finding Sahi Funds, you must look at how consistently the Fund has given better returns as compared to its Benchmark Index. Therefore, we have provided this data for 10 years, with colour-codes. If a Fund has Fund Returns mostly green in 10 years, then you can short-list it for the further analysis
Why is it important to look at the Implied Investor Return?
Implied Investor Return (IIR) is the approximate actual returns made by Individual Investors based on their entry & exit dates. It’s one of the important parameters to check while evaluating Sahi Funds.
Fund Returns are calculated for the calendar year, however, Investors’ Returns are different as they entered or exited a Fund at different time. For a Sahi Fund, the IIR should be equal or higher than the Fund Returns.
If IIR is lower than the Fund Return it could mean:
The Fund Manager has not communicated the Fund’s strategy (i.e. when it’s likely to perform better or to underperform), and therefore, retained investors OR
Investors’ have sold the Fund during the Fund’s underperformance, did panic-selling and/or bought back post its outperformance, for the fear of missing the opportunity OR
Investors received poor advice from Mutual Fund Distributor or there was a lack of good zero-conflict advice
Is the Traditional Way of looking at the Expense Ratio alone Sahi?
It is the annual fee that a Fund charges for managing the assets. It includes management fees, administrative fees, operating costs, and all other asset-based costs of the Fund. Expense ratio is one of the important parameters to check while evaluating Sahi Funds.
Often, Investors are misguided to see how low the Expense Ratio is. This would be right, only when all other things of the Funds being compared are the same. To know if a Fund is Sahi, the Expense Ratio should be seen in comparison to the excess returns (Alpha before expenses) a Fund has generated. Higher Expense Ratio is acceptable, if the Fund performance is superior. Typically small-sized Funds have higher expense Ratios due to high fixed costs, but due to smaller size they can generate better Alpha too.
How do the Drawdown Period & Recovery Days help assess a Fund?
Drawdown period is a period during which a Fund corrects at-least 15% from its recent Peak-value. Recovery days is the number of days taken by the Fund to reach its previous Peak-value. Ideally, a Fund should fall lesser than the market and recover earlier than the market. A Fund which falls harder but recovers faster is better than a Fund which falls less but takes longer to recover. It indicates that the Fund Manager has picked up better stocks after the correction for faster recovery.
How do the Upside and Downside Capture Ratio help assess a Fund?
It indicates how much of the Upside or Downside a Fund has been able to capture vis-à-vis the market. Funds usually follow a set process. As no process can work all the time, Funds perform during certain phase(s) and lag in the rest.
The Upside Capture Ratio denotes, when markets rise, how much of the upside a Fund captures compared to its Benchmark. Higher the Upside Capture Ratio, better the Fund would do in the rising markets. Similarly, the Downside Capture Ratio denotes, when markets fall, how much a Fund falls compared to its Benchmark. Lower the Downside Capture Ratio better the Fund would do in the falling markets.
Thus, the Upside and Downside Capture Ratio helps determine whether a Fund performs in rising markets or falling markets. However, these ratios will not be of much help, if a Fund frequently changes its process or doesn’t have a set process
MoneyWorks4me.com is India's 1st Technology-assisted Multi-asset Fiduciary Portfolio Advisory. We started in 2008 with the mission to make 'wealth-creation thru' investing' safe and simple for Retail Investors—make it easy for customers to manage a large portion of their Investable Surplus through our solutions as one portfolio, just like family offices/UHNIs. We are SEBI registered—No. INH000000719... know more