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Airawat Indices Private limited (AIPL) has launched a unique tool for MFDs/advisors/AMCs – ‘Fundex’- a series of Mutual Fund Category Indices , on Cafemutual through which one can compare performance of a fund with a mutual fund category index and peer group.
What is different in Mutual Fund Category Index (Fundex) is that it represents a benchmark, which is compiled based on the weightage average performance of the individual funds within the category using index tools. The weights are assigned based on the size of each fund in the category.
In this exclusive interview with Debasish Mohanty, CEO, AIPL, he takes us through this new tool and how you can use this to enable your clients to shortlist schemes. Read on the complete interview to know more.
What are the two important aspects of shortlisting funds for clients?
In our opinion, assessment of risk metrics from investors’ perspective and evaluation of consistency in performance are the two important aspects that MFDS should focus to shortlist funds for their clients after they decide on the asset allocation part.
While data on risk metrics is readily available in fund factsheets or various websites, MFDs can evaluate consistency of performance across business cycles by comparing the fund’s performance with the weighted average performance of the category or the benchmark index.
Many MFDs compare MF schemes with benchmarks to understand if the scheme has delivered alpha. Why do you think they should look at comparing the fund performance with peers or category average returns?
Comparing the fund performance with peers or category average offers an additional layer of comfort in terms of performance evaluation. It is like finding out a topper among classmates.
However, the currently available aids for comparison of fund with peers or category metrics are not not robust enough. It simply tells you its peer ranking based on absolute return for point-to-point performance or other proprietary ranking systems. The Fundex category comparison can answer questions like:
- How has my fund performed against the performance of the whole ‘Class’?
- Which fund is consistent in the class?
- Does size of the fund matter?
- Which funds are the long term ‘stars’?
- Is there any fund which has consistently performed in line with or above the category?
A category index based comparative analysis adds effectiveness to the process. An ideal comparison should
- Capture historical performance trend in a disciplined index format
- Enable Comparison with the actual performance of the class
- Enable detecting period of volatility inconsistent with the category
- Enhance the quality of comparability within the category
- Compare among categories with deeper insights
Performance of a whole category of funds can now be compared to their popular benchmarks too. So, for example, large cap Fundex vs nifty large cap 100 could be an interesting study.
Can you take us through the thought process of ‘Fundex’?
In 2018, SEBI had stipulated well defined categories for mutual fund products with clear investment objectives and asset allocation structures. In addition to bringing discipline in the context of product proliferation in the industry, this step greatly helped in removing confusion from the minds of investors and made it easy for prospective and existing investors to compare and take their investment decisions.
The product categorisation principle brought with it the new scope and advantages like:
- To be able to use Category as a Benchmark (CAB) - (Basically, creating a new benchmark based on average weighted of stock composition across schemes within the category)
- To ascertain Category Compared Alpha (CCA) (Capturing alpha generated by the fund compared to other schemes)
Investors, distributors, advisors and asset managers can compare and use MF Category index as a Benchmark (CAB) to analyse relative performances within the category.
It can also be considered by the AMCs, as one of the metrics for the performance measurement system for fund managers.
When there are stock indices available as benchmark, why do we need Fundex (Category Indices)? How is it different, and what purpose does it serve for MFDs?
Here are some key advantages of using Fundex:
- Comparison through Fundex accounts for expenses while benchmark index does not account for MF expenses
- Fundex reflects fully the regulatory constraints faced by each constituent of a category whereas benchmark index does not do so completely and wholly
- Fundex captures actual MF performance while benchmark index is calculated based on potential return from the group of stocks, which may or may not be translated into performance
- All funds in a particular category may or may not have the same benchmark
Since you will be publishing 'Fundex' on Cafemutual for MFDs soon, what can MFDs expect from it in terms of utility?
- Category index of MFs (Fundex) will serve a simple purpose i.e. it allows both investment manager and distributor to compare NAV returns of a scheme with the returns of all other funds in that category as a whole, over any duration
- Fundex will also allow advisors and distributors to quickly compare the NAV based performance of different schemes in the same category over the exact period of investment of their clients ( since 2018) , thus enabling them to review their client portfolio accurately
Also, will you charge a fee to offer these services; if yes, how much?
Airawat Indices Pvt Ltd is happy to offer this service free of charge to MFDs.
Who are the Promoters of Airawat Indices ?
Airawat Indices Private limited (AIPL) is a joint venture, promoted by Excellence Enablers and Decimal Point Analytics. Excellence Enablers is a niche corporate governance advisory entity. Decimal Point Analytics is a 20-year-old Indian company, that has been providing innovative solutions to global financial businesses and having experience in managing more than 400 indices in the global market.
Click here to read the FAQs on ‘Fundex’ with Cafemutual.
