9 active equity mutual funds that have performed better in last 4 years In this market, some actively managed mutual funds have managed to improve their returns over 4 years. Read on to learn more about the sectors and stocks commonly held by most of these mutual funds in this article
After significant turbulence in the fourth quarter of 2024, volatility in the domestic equity markets has continued to intensify in January this year. Increased FPI selling, amid a stronger US dollar and rising US bond yields, is weakening the investors’ sentiments. Foreign investors have sold net equities worth Rs.40,055 crore up to 16 January, according to data compiled from the NSDL website.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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The anticipation of lower rate cuts by the US Fed due to better economic growth prospects is imparting strength to both the USD and US bond yields. While the USD index is hitting levels last seen in November 2022, the US bond yields are close to 4.8%, the highest since November 2023, as per the data sourced from Reuters-Refinitiv.
Experts believe that volatility is unlikely to abate in the near term due to the uncertainty regarding the new US government policies, which will have implications for global supply chains and India’s macroeconomic prospects.
It’s likely that the pro-growth policies of Trump will impact India’s current account deficit (CAD) and rupee-dollar exchange rate. On the domestic front, weak household incomes, sluggish demand and high valuations will continue to keep the markets under pressure in the short term.
However, the long-term outlook for the Indian markets remains robust, driven by deleveraged corporate balance sheets, fiscal discipline, favourable demographics, digitisation, likely revival in manufacturing and rising per capita GDP. Despite visible positives, experts advise a multi-asset diversification approach to manage risks. A Mirae Asset Mutual Fund report recommends investing across market-cap strategies (depending on the risk profile). It also recommends hybrid funds, given their flexibility in asset allocation.
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The reports from Morgan Stanley and Ambit Capital expect that the equity market in 2025 will be a stock-picker’s market. Therefore, for those looking at only the equity segment, actively managed mutual funds can prove effective. This is because a stock picker’s market highlights the importance of choosing the right stocks and actively managed mutual funds aim at selecting stocks that are likely to succeed.
However, not all active mutual funds are good performers and it is important to pick the right ones to optimise risk and return. Given the current market conditions, it is better to look at the risk-adjusted metrics to identify good quality active equity funds. As equity funds invest in securities that are subject to systematic and unsystematic risks, the returns that such funds generate must be in accordance with the risks that they take.
Measure risk-adjusted return
Sharpe ratio is a standard risk-adjusted measure, which indicates how much excess return a fund has generated relative to the total risk (systematic and unsystematic) that it is exposed to. Systematic risk arises due to market-related factors, whereas unsystematic risk is due to internal or company-related factors.
Excess return is calculated by subtracting the fund’s return from the risk-free rate (government bond yield). The ratio of excess return to standard deviation is the Sharpe ratio, where standard deviation is a measure of the total risk. The higher the Sharpe ratio, the better the fund’s riskadjusted returns.
Funds whose quartile rankings have risen in past 4 years
We used quartile rankings of the Sharpe ratio over the past four calendar years to shortlist funds that have improved their risk-adjusted scores over a period of time. Sharpe ratios were calculated for 142 equity diversified funds using weekly rolling returns data for each of the past four calendar years—2021, 2022, 2023 and 2024.
What is quartile?
A quartile is a statistical tool that divides the data (or sample space) into four equal parts, with each part representing 25% of the sample space. The data (or sample space) in this case is the risk-adjusted returns of 142 funds as measured using the Sharpe ratio.If these returns are arranged in an ascending order, the funds with returns in the lowest 25% of the sample space belong to the first quartile, and funds with returns in 50% of the sample space fall within the second quartile. On the other hand, funds with returns in 75% of the sample space fall within the third quartile, and the remaining funds with returns in the highest 25% of the sample space fall above the third quartile.
The relative quartile rankings were evaluated to identify funds that have either improved their rankings to reach above the third quartile in 2024 or were above the third quartile in all of the four calendar years. In other words, the funds that have improved their Sharpe ratio rankings in the past four calendar years to reach above the top 75% of the sample space in 2024 were identified. In addition, the funds that have consistently remained in the top 75% of the sample space in all of the past four calendar years were also included.
The nine funds with 4-star or 5-star ratings by Value Research are listed in the table. The aggregate AUM of these nine funds stood at Rs.2.2 lakh crore at the end of November 2024 and grew by 67.8% year-on-year. Comparatively, the aggregate AUM of all equity diversified funds grew by 44.3%.
The expense ratio (annual fees charged by AMC) of seven out of the selected nine listed funds was lower than the average expense ratio of all equity diversified funds (data for November 2024). A lower expense ratio indicates lower investment costs. In terms of performance relative to their respective benchmarks, all nine funds outperformed in the past year, whereas eight out of nine funds outperformed in the past three years.
The nine listed funds have also performed well on another risk-adjusted measure, Jensen Alpha, which measures the difference between actual returns and expected returns (based on the fund’s risk level). Positive alpha indicates outperformance, whereas negative alpha indicates underperformance. All the nine funds generated positive alphas in the past year, which were higher than the average alpha generated by all equity diversified funds.
Looking at the portfolio composition, Zomato, HDFC Bank, Bharat Electronics, Persistent Systems and Fortis Healthcare were among the stocks that were held by most of these selected funds in November 2024. In terms of sectors, banking & finance, automobiles, capital goods, healthcare and retailing were among the favourites for most of the selected funds in terms of the number of shares held in November 2024.
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This story originally appeared on: India Times - Author:Faqs of Insurances
