The loss rate is defined as the number of time intervals of negative returns as a percentage of the total number of defined time intervals. This is calculated using rolling returns. The loss rate for a 1-year period is calculated as the number of days in which 1-year rolling returns were negative divided by the total number of 1-year rolling returns. So if the 1-year daily rolling returns were negative for 414 trading days out of 1,236 (1 March 2018 and 1 March 2023) for Baroda BNP Paribas Mid Cap Fund, it would mean a loss rate of 33.5%. On average, investors would have lost money on 33 out of every 100 trading days in past 5 years.
Similarly, the scale or range of loss rate across equity funds indicates that in the past 5 years, an investor who exited on any trading day after completing a 1-year holding period would have lost money a minimum of 15 times in every 100 trading days and a maximum of 53 times in every 100 trading days (on an average). Comparatively the loss rate of the Nifty 500 index based on 1-year daily rolling returns in the last five years was 25.3%. Such wide variation in loss rates across equity funds was visible over multiple time frames including 2-years,3-years and 5-years as well.
Funds at the lower end of the range have displayed lower volatility in their adjusted NAVs on a 1-year rolling basis compared to those at the upper end. The analysis of loss rate can help investors identify and choose funds based on their risk preference. Those with a low risk appetite can opt for funds with a low loss ratio.
ET Wealth tried to identify funds that have displayed low loss ratios across multiple time intervals. Similar loss rates were worked out on daily rolling returns for 2-year, 3-year and 5-year time intervals in addition to a 1-year interval. The same was compared with the loss rates of the Nifty 500 index for similar time intervals. Funds with a loss rate lower than the loss rate of the Nifty 500 across the given time frames were filtered out. There were 23 such funds. Nine are large-cap funds, seven are large and mid caps, four are flexi-cap funds and there were one each from multi-cap, mid cap and small cap categories.
Funds with the lowest 1-year loss rate
The quality of the 23 funds could be gauged by studying their ratings. Over 78% (18 funds) had 4 or 5-star ratings as per Value Research whereas over 56% (13 funds) had 4 or 5-star ratings as per Morningstar. The funds also scored well on the risk-adjusted metrics calculated for the last 1-year period. According to ACE MF data, 22 out of 23 funds have a beta of less than 1 which indicates lower volatility compared to the overall market.On the other hand, 83% and 65% of the funds have Sharpe and Sortino ratios higher than the overall equity fund category average. Sharpe ratio measures the excess returns (relative to risk-free rate) of a fund compared to its standard deviation, which is a measure of total risk. The Sortino ratio measures the excess returns of a fund relative to its downside risk, which is the standard deviation of negative returns.
The table contains 10 funds that have displayed the lowest loss rate based on oneyear rolling returns. The aggregate AUM of such funds jumped 25.8% y-o-y between January 2022 and January 2023 to Rs.1.23 lakh crore. The funds are well diversified with the average number of stock holdings close to the category average. However, the group on average has a slightly higher concentration risk with top five stock holdings constituting 28% of the AUM compared to the category average of 24.6%. Looking at the stocks and sector-wise break-up for the month of January 2023, banks, power, FMCG, automobile and ancillaries and mining are among the top five sectors in terms of the total number of shares held by the group of such 10 funds. ICICI Bank, ITC, Reliance Industries, HDFC Bank and Bharti Airtel are among the common stocks that were held by most of these 10 funds.
