Why To Evaluate Mutual Fund Performance Across Bull And Bear Market Conditions
Mar 30, 2019

Author: PersonalFN Content & Research Team

(Image by Gerd Altmann from Pixabay)

Equity mutual funds are struggling to beat the Total Return Indices (TRI).

As a mutual fund investor, you may not like to read about such developments.

Though you might be worried about your mutual fund investments, don't shun mutual funds or discontinue your Systematic Investment Plans (SIPs) in haste.

Consider analysing the performance of your mutual fund investments not just in the recent past; dig deeper. Try to find out how have they performed over different market phases.

Why should you analyse performance across market cycles?

For the same reason you would analyse the track record of a batsman on batting-friendly pitches as well as on the bowling-friendly pitches before selecting him in the playing-11. Consistency of your mutual fund portfolio plays an important role in your success as an investor.

Inconsistent funds may generate high returns in the bullish phase, but what purpose will it serve, if it can't protect the downside under bearish market conditions?

In last ten years, we have witnessed seven market cycles including the present one. However, the on-going corrective phase is unique for its own reasons. For the first time, the average returns generated by actively managed open-ended equity diversified schemes have underperformed both, Nifty 50-TRI and Nifty 500-TRI.

Table:1 Average or below average?

Bear Phase Bull Phase Bear Phase Bull Phase Bear Phase Bull Phase Corrective Phase
08/Jan/08 To 09/Mar/09 09/Mar/09 To 05/Nov/10 05/Nov/10 To 20/Dec/11 20/Dec/11 To 03/Mar/15 03/Mar/15 To 25/Feb/16 25/Feb/16 To 23/Jan/18 23/Jan/18 To 25/Mar/19
Average returns of mutual fund schemes -56.0 86.1 -26.1 31.1 -18.2 33.6 -7.6
NIFTY 50 - TRI -53.0 73.6 -24.6 25.3 -21.7 29.2 3.6
NIFTY 500 - TRI -57.7 81.7 -28.2 27.0 -20.1 33.6 -2.8
Data as on March 25, 2019
(Source ACE MF)

​Wondering why?

Too few stocks drove the indices. Compared to this, mutual funds held a greater number of stocks for the purpose of diversification. They eventually ended up holding on to more stocks that underperformed the broader indices.

Interestingly, under bearish market conditions, mutual funds find it difficult to outperform Nifty 50 and under bull market conditions it's hard to outperform Nifty 500.

Table:2 Beating bulls and bears both is difficult...

Bear Phase Bull Phase Bear Phase Bull Phase Bear Phase Bull Phase Corrective Phase
08/Jan/08 To 09/Mar/09 09/Mar/09 To 05/Nov/10 05/Nov/10 To 20/Dec/11 20/Dec/11 To 03/Mar/15 03/Mar/15 To 25/Feb/16 25/Feb/16 To 23/Jan/18 23/Jan/18 To 25/Mar/19
Number of schemes 91 103 119 122 135 138 143
% of schemes Outperformed NIFTY 50 - TRI 35.2% 74.8% 40.3% 85.2% 78.5% 71.0% 1.4%
% of schemes Outperformed NIFTY 50 - TRI 56.0% 53.4% 64.7% 68.9% 60.7% 46.4% 18.9%
Data as on March 25, 2019
(Source ACE MF)

Now let's check the consistency of mutual fund schemes across market cycles.

PersonalFN analysed 143 schemes. And findings are startling.

Hence always be with the schemes that have a dependable track record. Usually, mutual fund houses that follow stringent investment processes and employ experienced fund managers manage to perform well under any market condition. Thus, you might be better off if you invest in schemes such mutual fund houses offer.

Do you depend entirely on the star-ratings? It's a mistake.

Rarely, star-ratings will reflect the consistency of a fund across market cycles. Star-ratings usually take into account the performance of a scheme in the immediate past.

[Read:  Why Qualitative Aspects Are So Important To Pick Mutual Funds]

5 more mistakes you should avoid while selecting mutual fund schemes for your portfolio

  1. Not considering your financial situation, investment goals, risk profile, etc.

  2. Relying solely on past performance

  3. Ignoring qualitative parameters

  4. Opting for top star-rated funds

  5. Taking advice from friends and relatives

What's the right approach to pick mutual fund schemes for your portfolio?

You should consider a variety of qualitative and quantitative parameters to shortlist schemes for your portfolio. And importantly, you should track their performance regularly. Don't rush to sell them for their occasional underperformance, but chuck out persistent underperformers.

Watch this video to select the best mutual funds in 8 steps


Nonetheless, you should consider your financial goals and risk appetite before investing in mutual funds. You must follow your personalised asset allocation instead of investing arbitrarily in equity mutual funds.

PS : If you're looking at the best equity mutual funds that you could invest in 2019 right away, here is PersonalFN's special premium report: Top 5 Undiscovered Equity Funds to Invest In 2019.

This report tells you about five worthy, high growth potential equity schemes that can be instrumental in building significant wealth over the next 5-7 years.

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Mar 31, 2019

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