Ulcer Performance Index: New way to select MFs?
There are various ways available to measure the risk in mutual funds. Standard deviation is one of the most popular ways of measuring the risks in mutual funds. Apart from the standard deviation, there are various other methods such as beta, downside deviation, down capture ratio, etc. However, none of them clearly defines the investment experience of the investor. Ulcer index in one of the risk measures that helps you to understand the investment experience.
Ulcer index is developed by Peter G Martin that precisely captures the pain that investors witness throughout the investment horizon. In comparison to standard deviation, ulcer index provides more information. Ulcer index measures both the percentage of downfall and for what time such fall sustained from earlier highs.
However, all of these parameters only measures the risk involved and does not account for the rewards earned for the risks undertaken. Hence, for better mutual fund selection, it is prudent to check its risk-reward ratio.
There are various risk-reward ratios available such as the Sharpe ratio, which is the alpha generated as compared to the risk-free rate, considering the risk undertaken. Here, the risk is measured via standard deviation. Sortino ratio is also one such ratio, which measures the alpha earned over risk-free rate for each unit of risk taken. Here, the risk is denoted by downside deviation or standard deviation of negative returns.
Apart from these, we also have Ulcer Performance Index (UPI) which is nothing but alpha generated over risk-free rate for each unit of risk undertaken. Here, the Ulcer index is considered as a risk measure. This metric would help you to select mutual funds that generate better alpha over risk-free rates with better investment experience. To understand this better, let us take an example.
For illustration purposes, we would consider investments in large-cap funds. The period of study is from January 2015 to December 2019.
|
Funds
|
UPI
|
Sharpe
|
Sortino
|
5-Year CAGR (in per cent)
|
|
Mirae Asset Large Cap Fund
|
0.0125
|
6.52
|
9.08
|
11.75
|
|
Axis Bluechip Fund
|
0.0104
|
5.65
|
7.79
|
10.65
|
|
SBI BLUE CHIP FUND-REGULAR PLAN
|
0.0082
|
4.25
|
5.99
|
9.53
|
|
Canara Robeco Bluechip Equity Fund
|
0.0081
|
4.30
|
5.81
|
9.74
|
|
Motilal Oswal Focused 25 Fund (MOF25)
|
0.0078
|
4.49
|
6.34
|
9.99
|
|
Indiabulls Blue Chip Fund
|
0.0073
|
3.98
|
5.23
|
9.63
|
|
ICICI Prudential Bluechip Fund
|
0.0072
|
3.77
|
5.46
|
9.20
|
|
Kotak Bluechip Fund
|
0.0062
|
3.59
|
5.11
|
9.05
|
|
HSBC Large Cap Equity Fund
|
0.0057
|
3.08
|
4.28
|
8.76
|
|
BNP PARIBAS LARGE CAP Fund
|
0.0056
|
3.42
|
4.93
|
8.81
|
|
Nippon India Large Cap Fund
|
0.0052
|
2.98
|
4.30
|
8.86
|
|
Aditya Birla Sun Life Frontline Equity Fund
|
0.0046
|
2.57
|
3.64
|
8.15
|
|
UTI - Master Share
|
0.0043
|
2.49
|
3.50
|
8.05
|
|
LIC MF Large Cap Fund
|
0.0038
|
2.21
|
3.09
|
7.89
|
|
Tata Large Cap Fund
|
0.0036
|
2.17
|
3.07
|
7.83
|
|
L&T India Large Cap Fund
|
0.0033
|
1.88
|
2.58
|
7.65
|
|
HDFC Top 100 Fund
|
0.0031
|
1.70
|
2.45
|
7.69
|
|
DSP Top 100 Equity Fund
|
0.0030
|
1.67
|
2.39
|
7.61
|
|
Franklin India Bluechip Fund
|
0.0016
|
0.95
|
1.36
|
6.79
|
|
Taurus Large-cap Equity Fund
|
-0.0013
|
-0.81
|
-1.09
|
5.29
|
|
JM Large Cap Fund
|
-0.0024
|
-1.34
|
-1.73
|
5.11
|
The above table is sorted as per the largest UPI. From the above table, we can notice the difference clearly. The difference can be seen for SBI Bluechip Fund. As per Sharpe Ratio, Sortino and five-Year CAGR, SBI Bluechip Fund is not better than Motilal Oswal Focused 25 Fund. However, as per the Ulcer Performance Index, SBI Bluechip Fund is better than Motilal Oswal Focused 25 Fund.
As we can see in the above graph, Motilal Oswal Focused 25 Fund gave more returns than SBI Bluechip Fund. However, SBI Bluechip Fund gave better investment experience than Motilal Oswal Focused 25 Fund. Therefore, if your ultimate aim is to get better investment experience, then invest in funds with a higher Ulcer Performance Index.