Any day is a good day for investing in a mutual fund. And whenever you invest, you need your fund to deliver well – i.e., generate returns better than the market. Funds, however, do not necessarily fulfil that requirement. This is why consistency in performance matters.
What is it?
Say you invested in DSP BlackRock Top 100, a large-cap equity fund in January 2015, as the fund’s one-year were 5 to 6 percentage points higher than the BSE 100 index. Come February 2016, the fund delivered returns lower than the BSE 100 by 1 to 3 percentage points. By June, this trend reversed with the one-year returns back above the BSE 100 index.
Such sudden slips and recovery is not an aberration. This is why you need to ensure that a fund has kept ahead of its benchmark across market cycles and different periods before investing in it.
Why is it important?
Steadiness in performance is important because you should be able to earn market-plus returns no matter when you invest. A consistent fund ensures this. A consistent fund is always reliable. Secondly, you don’t run the risk that your fund is unable to make up its bad performance.
Thirdly, consistency measurement also removes the drawbacks of looking at point-to-point returns (the traditional one, three, and five-year returns) and being influenced by current chart-toppers. A point-to-point return assumes a single date of investment and return. If the fund has been doing well of late, it can inflate the returns when in actuality the fund had been doing badly for a long time before that. The reverse can also happen. Looking at the fund returns at different points of time, or in different market cycles will tell you whether the fund was always doing well or not.
How is it calculated?
The ideal way to check for consistency is to roll the specific return at regular intervals over a number of years. For example, you can take a fund’s one-year returns and its benchmark every day for a period of three years. That is, you calculate the one-year returns as on July 1, 2013 for the fund and the benchmark. Then you calculate the one-year returns as on July 2, 2013 then July 3, 2013 then July 4, 2013 and so on until July 1, 2016. Then you measure how many times the returns of the fund are above the benchmark. The higher the proportion of outperformance, the better is the fund’s consistency. You can take any period and any frequency of rolling.
Check for consistency in debt funds as well; debt, like equity, goes through cycles and returns can be inconsistent. Compare consistency of a fund with its peers in order to make a correct judgement.
Fund factsheets also provide one-year returns for three consecutive years at the end of each quarter for all the funds and their relevant benchmark. That is, in the July 2016 factsheet, you will find returns of June 2015-June 2016, June 2014-June 2015, and June 2013-June 2104. In the April factsheet, you will find the returns ending in the March quarter. Pick up the factsheet in different quarters for different years to measure consistency. Use consistency together with risk-adjusted returns and volatility for the best idea of a fund’s quality.
Blog source: http://www.fundsindia.com/blog/mutual-funds/fundsindia-explains-what-is-consistency/9443