This is the second of a two part series. In the first part, we had examined how high performing Equity Oriented Mutual Funds have given eye-popping returns (at times in excess of 20% annually) over timeframes as extended as 20 years, making them arguably the best suited instrument for long term wealth creation for retail investors.

In this second part, we’ll examine how today’s best performing funds aren’t necessarily going to be so forever, and hence why the only way to sustain the superlative returns that equity mutual funds are known to generate is by investing in them through platforms that support automated rule based investing, monitoring and rebalancing of your portfolio – something that’s impossible to achieve through human-driven manual monitoring.

By Indranil Guha

 

In the first part of this series, we had examined the extraordinary performance of five equity mutual funds covered by the Economic Times in a piece titled “Five mutual fund schemes which have returned an average of 20% every year”. This piece can accessed here. These funds have generated returns of 20%+ annually over a period extending last 20 years.

Stellar as the performance of these funds has been, the 20 year picture masks an important detail – that few of the funds covered by ET in the above piece have severely under-performed in recent years. The following table illustrates the returns that these five funds have generated over the last 20, 15, 10, 5, 3 and 1 year timeframes.

 HDFC Equity FundFranklin India Bluechip FundFranklin India Prima FundBirla Sun Life Advantage Fund Reliance Growth Fund
Fund CategoryMulti Cap Large CapMid CapMulti Cap Mid Cap
Last 20 Years22.9%17%22.2%17.7%24%
Last 15 Years24.6%21.6%28.3%19.2%28.2%
Last 10 Years15%14%16.3%12.6%15.1%
Last 5 Years10.3%11.4%21.7%15.1%12.5%
Last 3 Years19.6%17.7%32.7%28.3%23.5%
Last 1 Year-0.9%4.6%10.5%6.3%3.2%
Annual return generated over various timeframes (returns as of 1 Jul 2016)

 

Now let’s take a look at the relative performance of these funds vis-a-vis their peer funds within their respective categories. The following table outlines the ranking of the five funds within their fund categories based on the return they’ve generated over various timeframes:

 HDFC Equity FundFranklin India Bluechip FundFranklin India Prima FundBirla Sun Life Advantage Fund Reliance Growth Fund
Fund CategoryMulti Cap Large CapMid CapMulti Cap Mid Cap
Last 10 Years8563012
Last 5 Years43134828
Last 3 Years873920753
Last 1 Year13213112452
Ranking of funds within their category based on the return they generated over various timeframes
(Source: Value Research, ranks as of 1 Jul 2016)

 

There are no permanent star performers

The information in the above two tables, when assessed in conjunction throw up a few interesting insights. The second table is especially revealing. It’s when one looks at the relative performance of the five funds, as tabulated in this table that it starts becoming more and more apparent how some of these funds have severely under-performed vis-a-vis their peer funds in recent years. For example – the ranking of HDFC Equity Fund has progressively worsened as one moves from rankings over last 10, 5, 3 to 1 year timeframes. So much so that in the last 1 year, the fund has not been able to make it to even the top-100 funds within its category (of multi-cap funds). Similarly, Reliance Growth Fund has consistently failed to make it to the top-50 funds within the category of multi-cap funds over the last 3 years and 1 year timeframes. The rankings of Franklin India Bluechip Fund and Franklin India Prima Fund on the other hand have improved in recent times.

Why you can’t “invest-and-forget”

What does all this mean for you a retail investor? It means that like everything else in life, a star performer of today isn’t necessarily going to remain so for all times to come. Performance of high performing funds can deteriorate over time for a multitude of reasons such as a change of fund manager or the investment strategy employed by the fund manager having run its course. And hence, contrary to the “invest-and-forget” mantra dished out by many a pundits of long term investing, it’s imperative for retail investors to monitor the performance of their investment portfolio at regular intervals and churn the portfolio if any fund in the portfolio has been under-performing for an extended timeframe.

Let the “Robos” take over

Now the continual monitoring of one’s investment portfolio can be tricky business. Imagine doing a monthly review of your portfolio, which involves calculating the returns and rankings of funds in your portfolio over various timeframes and evaluating their key performance metrics such as rolling average returns over 1, 3 and 5 years, standard deviation, Sharpe ratio, alpha, beta and what not!!! If done manually, it’s simply too arduous a task – if not outright impossible – even for a professional investment advisor, let alone a layman retail investor. And this is where technology can lend a helping hand. Technology driven investment platforms, also popularly called “robo-investing” platforms (such as finpeg) are ideally placed to not only pick the best suited mutual funds for you to invest in but also monitor the performance of your legacy investments. These platforms are typically fed a set of rules (or algorithms) involving the evaluation of hundreds of parameters and performance metrics, based on which they pick high performing funds for retail investors to invest in an unbiased and transparent manner, which is in stark contrast to human financial planners, whose advice is often coloured by ulterior considerations such as commissions they are likely to earn from the funds they sell. Furthermore, robo-investing platforms are also ideally positioned to conduct automated and continual monitoring of your investment portfolio, again based on a set of rules (or algorithms) involving the evaluation of hundreds of parameters and performance metrics over various timeframes. As a result, they can pick signs of prolonged under-performance of fund/s in your portfolio before it’s too late and flag the same to you for necessary intervention in a far more efficient manner than human financial planner and advisors can.

Bottom-line

It’s for this reason that arguably the only way to sustain the superlative returns that equity mutual funds are known to generate is by investing in them through platforms that support automated rule based investing, monitoring and rebalancing of your portfolio – something that’s impossible to achieve through human-driven manual monitoring.

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