I recently learned about Pain ratio (Return/Risk) which measures risk considering the depth and the duration of drawdowns. For more details on how it is calculated kindly visit https://www.swanglobalinvestments.com/pain-index-better-measure-of-risk/ . So Like other measures thought of doing a study using indian Equity growth mutual funds.
Using AMFI database I was able to extract data for all indian equity growth mutual funds (Since 2006). First I calculated the pain ratio for the entire period of existence of mutual funds. Then I select the top few, Clearly, few funds stand out like –
To check whether these results hold in yearly timescales, I calculated the pain ratio yearly and filtered by top few funds. Almost every year, randomly only few funds in the above top list come each year. While none of the funds appear almost every time.
What does it mean?
All the ex-post analysis or stories of choosing the best mutual funds after they are successful is almost impossible to know before. In my experience all ex-post analysis is filled with survivorship bias, Choosing successful funds before and later is entirely a different game.
Next time your distributor or advisor if recommends you some funds its most likely based on these ex-post analysis (Meaning the funds which have performed good rarely keep on doing so) – ask him his strategy of choosing funds. Beware “Mutual funds sahi hai” won’t give you money.
Additional notes:
The distribution of pain ratio seems to be fat tailed, however this requires further analysis. Another interesting part will be to study, funds on some ratio like pain ratio or sharpe ratio most likely you are not considering the risk which is not in your data, which may result in a blowup.
Exit Strategy 