Introduction

Investors often seek mutual funds that can not only generate returns in bullish phases but also protect capital during market downturns. This article examines funds that have outperformed their respective benchmarks and category averages during market declines, particularly from September 2024 to Feb 2025. The selection is based on key performance metrics such as the downside protection ratio and three-year rolling returns.

To provide a robust comparison, we have analyzed funds across five key categories, each benchmarked against their respective Total Return Index (TRI):

• Small-cap funds benchmarked against the Nifty Smallcap 250 TRI

• Mid-cap funds benchmarked against the Nifty Midcap 150 TRI

• Multi-cap funds benchmarked against the Nifty500 Multicap 50: 25:25 TRI

• Large & Mid-cap funds benchmarked against the Nifty LargeMidcap 250 TRI

• Flexi-cap funds benchmarked against the Nifty 500 TRI

The primary goal of this analysis is to identify funds that not only perform well in bullish conditions but also offer strong downside protection, reducing losses when markets decline. By focusing on funds with superior downside protection and consistent three-year rolling returns, investors can make informed decisions that align with their risk tolerance and investment goals.

Analysis of the Article: Understanding the Objective, Methodology, and Calculation

Objective of the Analysis

The core objective of this study is to find mutual funds that:

• Outperform during market downturns – Investors seek funds that can minimize losses when markets fall.

• Provide consistent long-term returns – The funds should not only perform well in corrections but also have a strong 3-year rolling return history.

• Exceed benchmark and category performance – The selected funds should beat both their Total Return Index (TRI) benchmarks and their respective category averages.

• Offer downside protection – The ability to limit losses when the market is down is a key indicator of stability.

By focusing on these factors, investors can select funds that align with both wealth creation and risk management objectives.

Methodology for Selecting Outperforming Funds

Step 1: Categorizing the Funds

Mutual funds were divided into five broad categories based on their investment focus. Each category was benchmarked against its Total Return Index (TRI) for fair comparison:

• Small-cap funds → Nifty Smallcap 250 TRI

• Mid-cap funds → Nifty Midcap 150 TRI

• Multi-cap funds → Nifty500 Multicap 50:25:25 TRI

• Large & Mid-cap funds → Nifty LargeMidcap 250 TRI

• Flexi-cap funds → Nifty 500 TRI

Step 2: Analyzing Recent Market Correction (Sept 2024 - March 2025)

The performance of funds during the market correction was examined.

• Funds that had better returns than their benchmark index were selected.

• Example: If Nifty Smallcap 250 TRI fell by -24.78%, any small-cap fund that fell by less than -24.78% was considered better than its benchmark.

Step 3: Evaluating Three-Year Rolling Returns

Rolling returns offer a smoother performance metric rather than just point-to-point returns.

• Funds were compared on the basis of their 3-year rolling return from January 2018 to January 2025.

• To be selected, a fund had to have a higher rolling return than both:

  • Its benchmark TRI

  • The average return of all funds in its category

Step 4: Measuring Downside Protection Ratio

The downside protection ratio calculates how well a fund performs in falling markets. Calculation:

1. Identify all months since January 2018 where the benchmark TRI had a negative return.

2. Check how the fund performed in those months.

3. Calculate the percentage of times the fund outperformed its benchmark during those negative months.

4. Only funds with 80% or higher downside protection ratios were selected.

Here is the list of the 9 funds that outperformed the benchmark indices and Categories

Key Takeaways from the Analysis

1. Funds with Strong Downside Protection:

   • Multi-cap funds had the highest downside protection ratio (85.7%), indicating strong resilience in market downturns.

   • Small-cap funds followed closely with an 83.5% downside protection ratio, showing their ability to limit losses despite their inherent volatility.

2. Top Performers During Market Correction (Sept 2024 - Feb 2025):

   • Small-cap, mid-cap, multi-cap, large & mid-cap, and flexi-cap funds were analyzed.

   • Outperforming funds had smaller declines than their respective benchmarks, proving their defensive strength.

   • Small-cap funds saw the largest market decline (-24.78%), yet 27 out of 28 small-cap funds outperformed the benchmark.

3. Consistent 3-Year Rolling Returns (Jan 2018 - Jan 2025):

   • Small-cap funds had the highest average 3-year rolling return of 32.33%.

   • Multi-cap funds followed with an average 3-year rolling return of 25.39%.

   • Flexi-cap funds had the lowest rolling return (20.81%), but still managed to outperform both their benchmark and category average.

4. Final 9 Funds That Outperformed:

   • Axis Small Cap, Edelweiss Small Cap, Nippon Small Cap, Tata Small Cap, HDFC Midcap opportunities, ICICI Pru Multicap, Nippon India Multi Cap, Kotak Equity Opportunities and Parag Parikh Flexi Cap were the top funds across their respective categories.

   • These funds consistently outperformed their benchmarks in both market downturns and long-term performance.

5. Investment Implications:

   • Funds with high downside protection and strong rolling returns are more stable investment choices for long-term wealth creation.

   • Investors can minimize losses in downturns while maximizing gains over time by selecting funds with strong risk-adjusted returns.

   • This approach helps balance wealth creation and risk management, making portfolio decisions more strategic.

Conclusion

By analyzing the downside protection ratio and three-year rolling returns, we identified funds that not only excelled in the latest market correction but also demonstrated long-term resilience. These funds provide a strategic option for investors aiming to minimize risk while maintaining strong returns. Investors should consider their risk tolerance and investment horizon before making investment decisions.