Is it possible to be invested in the best performing mutual fund scheme always?

by Adityavikram Dube
10 months ago
199 Views

Did Don Bradman (considered the God of cricket) or Sachin Tendulkar or Virat Kohli score a century every time they walked out to bat? Or did Shane Warne or Glenn McGrath or Muttiah Muralitharan or Anil Kumble take 5 wicket hauls every time they bowled? Obviously, answer to both the questions above is No.

Then why are investors always looking to invest in best performing equity scheme all the time?

In doing so they will exit from one scheme (or stop SIP) and invest in another (or start SIP) which has been the best performing scheme recently. And the same cycle will get repeated every 12-18 months. By doing so, are investors doing themselves a favour or are they harming their portfolio?

To find answers to the question above, I considered for my study mid cap equity mutual fund schemes that have a track record of more than 5 years as on 31st December 2019. I took their performance (absolute return) for each calendar year and then ranked them from 1 to 21 i.e. highest to lowest absolute return. For easy of understanding, I have highlighted absolute return and ranks as under:

  • Rank 1 to 5 – Green (Quartile 1)
  • Rank 6 to 10 – Blue (Quartile 2)
  • Rank 11 to 15 – Orange (Quartile 3)
  • Rank 16 to 21 – Red (Quartile 4)

Source: Morningstar

Given my 14+ years of work experience in the Wealth Management industry, findings of the study are not surprising:

  • No one single scheme could retain the top spot (#1 rank) across timelines (calendar years).
  • Axis Midcap Fund: which was the best performing schemes (#1 rank) in 2019 and 2018, was ranked # 19th and # 20th in 2016 and 2015, respectively. Any guesses which quartile will it end in the year 2020?
  • Some schemes were consistent under performers across timelines, predominantly in quartile 3 & 4 – Baroda Midcap Fund; PGIM India Midcap Opportunities Fund; Quant Midcap Fund.
  • While with some schemes the performance was erratic (flash in a pan) – UTI Midcap Fund was #1 performing fund in 2014 but its performance has been in quartile 3 & 4 since.
  • Just three schemes have performed consistently (never featured in 4th quartile) – Invesco India Midcap Fund; Kotak Emerging Equity Fund and L&T Midcap Fund.

Learnings/Conclusion:

  • least an investor can do is stick to good schemes that they have invested in and weed out the perennial underperformers.
  • in the process of shifting from one scheme to another, investors are unable to visually see the impact of compounding.
  • this musical chair in performance and rankings is not restricted to Mutual Funds schemes but also happens in PMS schemes.
  • do not give your money to fund managers who deviate from their investment mandate (there are quite a few of them).

I do not recommend investing in mutual fund schemes just based on ranks (but a lot of investors do). There are a host of other variables that go into shortlisting mutual fund schemes that we recommend to our clients for investment but more on that some other time…

Above article has been authored by Mr Adityavikram Dube, Co-founder and Partner of Qber Asset Advisors LLP (SEBI Registered Investment Advisor).

Twitter handle: @QberAssetAdvizr 

Tags: , , , , , , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *