MF Schemes on basis of risk-adjusted performance

The ET Quarterly MF Tracker lists MF Schemes on the basis of their risk-adjusted performance, based on a detailed number crunching exercise carriedout by the ET Intelligence Group. Research has been done in-house, while data was sourced from Accord Fintech. The Sortino ratio, a superior risk-adjusted measure, was used to assess the fund performance. We take three years performance as the yardstick for the five broad categories of funds—equity diversified, equity-linked savings scheme (ELSS), balanced, monthly income plan (MIP) and debt. Schemes with similar risk-return profiles are clubbed.

The return score is arrived at by allotting 60% weight to the past three year’s absolute return and 40% weight to the past one year’s return. These weighted returns are then compared to the weighted benchmark return for the period and the resultant figure denotes the return score for the scheme. We have assumed BSE 500 as the benchmark for the equity schemes and risk-free interest rate by SBI, corresponding to the periods under consideration as the benchmark for non-equity categories.

To measure risk, we look at the downside risk. Downside risk is any return below the minimum acceptable rate of return (MAR). Benchmark returns have been taken as MAR. We looked at the monthly returns for the past three years. The monthly returns were analysed vis-à-vis the benchmark returns for that particular month for each of the categories under consideration. Any underperformances, for each scheme, were added. These underperformances signify the risk associated with the schemes and thus forms the risk score for each of the scheme.

The return score is then divided by the risk score to arrive at the Sortino ratio for each of the categories. Higher the Sortino ratio, the better is the fund’s performance. The top 10% funds in each category are then classified as ‘Platinum’ funds; the next 20% are graded ‘Gold’ while the next 40% are classified as ‘Silver’.

Source: http://economictimes.indiatimes.com/articleshow/5937656.cms