How to evaluate MF scheme historical performance

Come this September and it will be a decade since the world faced the Great financial crisis of 2008 caused primarily due to the sub-prime crisis, which ended in March 2009. This had a devastating impact on the stock market, which fell by almost 55% from its top. Sensex is already 3.75 times higher from the lows it had seen in March 2009. This may be a cause of celebration for most of the investors who remained invested during all these periods. Nevertheless, this is also likely to improve the performance of various equity funds in a 10-year period.

Currently, there are 183 equity funds that were active even in 2008. The median return of these funds was -41.75% in the year 2008. From next year, that is from 2019, while calculating the 10-year return of these funds, the bad phase of 2008 will be no more counted and will suddenly show an improved performance in a 10-year period. According to our analysis, even if these funds continue to perform on an average, what they have performed in the last nine years, the average returns of these funds will improve by 9 per cent. This will have a positive impact on these funds as they will suddenly appear in the radar of those investors who look at longer time horizon to make investments.

The above analysis clearly points out towards one thing, that is the returns very much depend upon the starting and ending point of your calculation. Therefore, to correctly judge the historical performance of the funds you need to remove any abnormal years like 2008 as the inclusion of the performance of these years may not present a correct picture. Moreover, the number of funds that completed 10 years is only 50 per cent of all the open-ended equity funds that are active now. Therefore, it reduces your investment universe further.

Hence, an ideal way to gauge the performance of a fund is when the intra-year movement of the benchmark is high while the performance on yearly basis remains flat. One such year is 2016, which saw BSE Sensex’s intra-year movement of 27.25 per cent, while it closed just 2% above where it opened. Years like this shows a better picture of the fund as they throw light on how the risks are managed.