However, wealth managers suggest it is better that investors watch out for consistency in performance
1. What is consistency?
A mutual funds scheme that gives returns above its bench mark at all times is a consistent fund. Based on market movements, the fund's net asset value (NAV) will decline or rise. However, this change is fine as long as it is lower than the benchmark.
Say you invested in a large-cap equity fund, which is bench marked to the Nifty .
Now in January 2014, the funds 2-year returns were ahead of the Nifty by 8%.
However, by January 2015, the fund end ed up with lower returns than the Nifty by 2%. Again by August 2016, the fund outperformed the Nifty by 1%, then the fund performance is inconsistent.
Mutual fund analysts recommend those schemes that consistently beat their benchmark returns over long periods of time.
2. How is consistency calculated?
There are various ways to calculate consistency . You can take a fund's one-year returns and its benchmark on eve ry day for a period of five years. Fore example, You calculate the one-year returns as on April 1, 2011 for the fund and the benchmark. Then you calculate the one-year returns as on April 2, 2011 then April 3, 2011 then April 4, 2011 and so on until July 1, 2016. Once that's done, you measure how many times the returns of the fund are above the benchmark. The higher the outperformance, the better is the consistency . Finally, compare consistency of a fund with its peers in order to arrive at a decision.
3. Why is consistency an important parameter?
Consistency in performance is important as any investor would like to earn above average returns in an actively managed fund. A consistent and reliable fund ensures this. Consistency also eliminates the drawback of looking at point-to-point returns and being influenced by current performers. This is because a point-to-point return accounts for a single date of investment and return. If the fund has been doing well in the period you measure, it can inflate the returns even though the fund may be a bad or mediocre performer. Hence, measuring fund returns at different points of time, or in different market cycles, will tell you whether the fund was always doing well or not.
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