A 6-MONTH PERSPECTIVE TO RISK ADJUSTED RETURNS
The immediate response to this title would be; “Is 6 months not too short a period to evaluate mutual funds?” Actually, for equity funds and hybrid funds, 6 months is still a very short period. However, the main purpose is to track the performance since the stock market indices peaked in late September. The last 5 months have seen a combination of heavy FPI selling and a vertical fall in the markets. The idea of looking at 6-month returns is to assess how various fund categories have performed on risk-adjusted returns (based on range). Here are the winners and losers across categories.
CAPITALIZATION FUNDS: RANKING ON 6-MONTH RISK ADJUSTED RETURNS
How did market cap equity funds stack up on 6-month returns?
| Active Equity Funds – MCAP | Average | Best | Worst | Range | Risk-Adj Returns |
| Large & Mid- Cap | -10.58 | -4.55 | -28.01 | 23.46 | -0.4510 |
| Flexi Cap | -10.34 | 1.79 | -18.87 | 20.66 | -0.5005 |
| Large-Cap | -8.47 | -3.82 | -19.11 | 15.29 | -0.5540 |
| Multi-Cap | -10.88 | -8.25 | -20.02 | 11.77 | -0.9244 |
| Mid-Cap | -12.56 | -6.61 | -18.57 | 11.96 | -1.0502 |
| Small-Cap | -15.22 | -10.53 | -23.61 | 13.08 | -1.1636 |
Data Source : Morningstar
Based on 6-month returns, all the six categories of market cap equity funds have given negative average returns. An interesting observation is that funds with allocation discretion between large and mid-caps have done better as they have diversified their risk with better stocks across categories. Not surprisingly, the mid-cap funds and the small cap funds have been hit by steep negative returns and higher volatility.
EQUITY THEMATIC FUNDS: RANKING ON 6-MONTH RISK ADJUSTED RETURNS
How did thematic equity funds stack up on 6-month returns?
| Active Equity Funds – Thematic | Average | Best | Worst | Range | Risk-Adj Returns |
| Sector – Financial Services | -3.68 | 1.90 | -17.29 | 19.19 | -0.1918 |
| Sector – Technology | -1.56 | 2.40 | -4.84 | 7.24 | -0.2155 |
| Sector – Healthcare | -4.33 | 1.67 | -15.34 | 17.01 | -0.2546 |
| Focused Fund | -9.74 | -1.30 | -22.56 | 21.26 | -0.4581 |
| ELSS (Tax Savings) | -9.92 | -3.65 | -19.86 | 16.21 | -0.6120 |
| Value | -11.90 | -2.41 | -19.41 | 17.00 | -0.7000 |
| Equity- Infrastructure | -17.72 | -10.32 | -26.57 | 16.25 | -1.0905 |
| Dividend Yield | -11.76 | -7.22 | -12.53 | 5.31 | -2.2147 |
| Contra | -9.45 | -7.68 | -11.28 | 3.60 | -2.6250 |
| Sector – FMCG | -7.29 | -13.30 | -14.23 | 0.93 | -7.8387 |
| Equity – ESG | -8.76 | -6.92 | -7.51 | 0.59 | -14.8475 |
Data Source : Morningstar
All the 11 thematic fund categories also gave negative average returns in last 6 months. Apart from IT and healthcare, which have been dollar defensives, private banks helped the financial services story hold up in last 6 months. FMCG made a rare appearance near the bottom, with steeply negative returns and high volatility.
HYBRID ALLOCATION FUNDS: RANKING ON 6-MONTH RISK ADJUSTED RETURNS
How did the hybrid allocation funds stack up on risk adjusted returns?
| Hybrid Allocation Funds | Average | Best | Worst | Range | Risk-Adj Returns |
| Conservative Allocation | -0.26 | 5.23 | -19.51 | 24.74 | -0.0105 |
| Equity Savings | -1.16 | 2.46 | -29.14 | 31.60 | -0.0367 |
| Dynamic Asset Allocation | -5.17 | 0.87 | -21.14 | 22.01 | -0.2349 |
| Balanced Allocation | -2.50 | 1.26 | -6.32 | 7.58 | -0.3298 |
| Aggressive Allocation | -6.80 | -0.88 | -14.30 | 13.42 | -0.5067 |
Data Source : Morningstar
All 5 categories of hybrid allocation funds have give negative average returns in the last 6 months. That can be attributed to the exposure to equity. However, conservative allocation funds, with the lowest allocation to equities, have given the best performance. Not surprisingly, aggressive funds find themselves at the bottom of the heap.
ACTIVE DEBT FUNDS: RANKING ON 6-MONTH RISK ADJUSTED RETURNS
How active debt funds stacked up on risk adjusted returns in last 6 months.
| Active Debt Funds | Average | Best | Worst | Range | Risk-Adj Returns |
| 10 yr Government Bond | 3.71 | 4.21 | -0.52 | 4.73 | 0.7844 |
| Corporate Bond | 3.45 | 4.19 | -0.36 | 4.55 | 0.7582 |
| Floating Rate | 3.64 | 6.22 | 1.31 | 4.91 | 0.7413 |
| Banking & PSU | 3.32 | 4.39 | -0.09 | 4.48 | 0.7411 |
| Government Bond | 3.24 | 4.31 | -0.25 | 4.56 | 0.7105 |
| Money Market | 3.15 | 3.87 | -0.64 | 4.51 | 0.6984 |
| Medium to Long Duration | 3.09 | 4.44 | -0.60 | 5.04 | 0.6131 |
| Ultra Short Duration | 3.23 | 5.20 | -0.47 | 5.67 | 0.5697 |
| Dynamic Bond | 3.04 | 5.07 | -0.57 | 5.64 | 0.5390 |
| Short Duration | 3.54 | 6.40 | -0.77 | 7.17 | 0.4937 |
| Long Duration | 2.76 | 4.24 | -2.94 | 7.18 | 0.3844 |
| Low Duration | 3.17 | 7.42 | -1.48 | 8.90 | 0.3562 |
| Credit Risk | 3.79 | 10.94 | -0.08 | 11.02 | 0.3439 |
| Medium Duration | 3.46 | 8.18 | -14.86 | 23.04 | 0.1502 |
Data Source : Morningstar
With average returns of debt funds converging towards a certain median, it is risk that holds the key to the ranking of active debt funds on risk-adjusted returns. At the top, the longer duration categories like G-Sec funds and corporate bond funds gained from better returns and lower volatility risk. It was the lower quality funds with question marks over portfolio quality, where the pressure was most evident; largely due to enhanced risk.
ALTERNATE FUNDS: RANKING ON 6-MONTH RISK ADJUSTED RETURNS
Here is how alternate funds staked up on risk-adjusted returns.
| Alternate Funds | Average | Best | Worst | Range | Risk-Adj Returns |
| Sector – Precious Metals | 18.67 | 21.64 | 15.35 | 6.29 | 2.9682 |
| Liquid | 2.99 | 39.06 | -4.99 | 44.05 | 0.0679 |
| Arbitrage Fund | 3.06 | 3.84 | -22.47 | 26.31 | 0.1163 |
Data Source : Morningstar
We have considered 3 categories of funds here viz. precious metals, arbitrage funds, and liquid funds. Gold funds stand out not only as the best pick among alternate funds, but as the best pick across all fund categories. It is tough to find a better asset class with buoyant returns and low volatility risk as gold in the recent past.
Risk adjusted returns forces funds to optimize performance. In current markets, you cannot score on positive returns. The focus should be to manage risk, and these are the fund categories that have scored. In the last 6 months, leadership has been less about chasing returns and more about managing risk. Low volatility, limited fund manager discretion, and a rule-based approach seems to be the golden mantra!