iNVESTT’s Algorithm to Find Consistent Mutual Fund Champions

Introduction:

Selecting the right mutual funds is like navigating a maze without a clear map. At iNVESTT, we recognize the struggles investors face in finding consistent and top-performing funds. After 11 months of rigorous research, we’ve developed the iNVESTT Mutual Fund Selection Methodology—a comprehensive algorithm designed to identify the best funds based on historical performance metrics. We call it the iNVESTT GOLDEN TRIANGLE Methodology, and it’s built on three pillars.

The Problem with Star Ratings:

Many investors rely on star ratings, assuming they indicate consistent success. However, research shows that a significant number of 5-star rated funds lose their momentum shortly after gaining attention and high assets. According to Morningstar research, less than 40% of 5-star rated funds remain 4-5 star rated. iNVESTT’s methodology aims to improve this success ratio to upto 70%.

Let’s delve into the key parameters of our GOLDEN TRIANGLE methodology

1. Rolling Returns (50% Weightage):

Understanding Performance Over Time: Think of rolling returns like watching a film. Instead of a static picture, it’s a reel showing the fund’s performance across various timeframes. We look at its returns in different rolling windows, giving a sense of its consistency.

Why It Matters: This helps us identify how a fund performs consistently, not just occasionally shining. For example, if Fund A shows a 40% return one year but -10% the next, while Fund B maintains a steady 20%, Fund B becomes the winner in terms of consistent, reliable growth. That’s why rolling returns carry the most weight in our methodology.

2. Sharpe Ratio (15% Weightage):

Understanding Risk and Reward: Think of the Sharpe Ratio as the reward you get for the risks you take. It measures the gap between average returns and the risk-free rate (like government bonds), factoring in fluctuations (standard deviation).

Sharpe Ratio = (Average Return – Risk-Free Rate) / Standard Deviation

Why It Matters: A higher Sharpe Ratio means a fund rewards you well for the risks involved. It’s a crucial aspect, so we allocate 15% weightage to it in our analysis.

3. Chance of Beating the Market (15% Weightage):

Consistent Outperformance: This isn’t just about outperforming the average investor; it’s about consistently surpassing the benchmark index, the broad measure of the market. We analyze the fund’s historical performance compared to the index, calculating the probability of it consistently beating the market over diverse timeframes.

Why It Matters: For example, if a fund beats the market 60% of the time, it shows a strong tendency to outperform. This is a valuable asset in your portfolio, which is why we give it 15% weight in our selection process.

4. 1 Year Rolling Returns (10% Weightage):

Spotting Short-Term Trends: While rolling returns showcase long-term consistency, the 1 Year Rolling Returns provide insight into a fund’s short-term performance. It identifies both underperformance and overperformance, offering a snapshot of recent trends.

Why It Matters: With a 10% weightage, this ensures we consider both short and long-term performance for a more balanced assessment.

5. Upside and Downside Capture Ratio (10% Weightage):

Capturing Market Movements: Upside and Downside Capture Ratios measure a fund’s ability to capture positive and negative market movements. For example, if the market goes up by 10% and the fund rises by 12%, it has an Upside Capture of 120%. Conversely, if the market drops by 10% and the fund only falls by 8%, it has a Downside Capture of 80%.

Why It Matters: With a 10% weightage, it ensures that a fund’s ability to navigate both upward and downward market trends is factored into the selection process.

iNVESTT Weightage Table

The iNVESTT Advantage:

By applying these parameters, the iNVESTT methodology narrows down the pool of potential funds. This reduction ensures that only the most consistent performers remain, making the investment decision-making process more straightforward. Instead of overwhelming investors with numerous options, our methodology streamlines the selection to less than five funds per category.

Our rigorous analysis reveals a stark contrast. While traditional methods yield a success rate of around 40% in terms of identifying consistent top performers, iNVESTT’s methodology catapults that success rate to a staggering 70%.

Conclusion:

At iNVESTT, we understand the Pain of investors faced with an overwhelming number of fund choices. Our Mutual Fund Selection Methodology aims to simplify this process by focusing on historical parameters that truly matter. By assigning weights to Rolling returns, Sharpe ratio, and the chance of beating the market, we provide a systematic approach that increases the likelihood of selecting funds with a proven track record of success. It’s not about chasing stars; it’s about investing with confidence in a methodology that prioritizes consistency and performance.