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Survivorship Bias Free Returns

posted Nov 19, 2019, 11:59 PM by Harshul Vohra   [ updated Nov 20, 2019, 12:12 AM ]

The mutual fund industry’s trade body, AMFI, reports all fund performance data after deleting the results of the funds which have been shut down. Since nearly 20% of Indian large cap mutual fund schemes have been wound up over the past five years, excluding these dead schemes obviously improve the industry’s performance (on the reasonable presumption that the funds which have been shut down were the worst performing funds)

When the average returns of mutual funds are calculated, they are of funds that exist over the entire period of study. That is, it is a return of the survivors. What about funds that are closed or merged during the period? How does that affect average returns? Since it is impossible to know at the start of the period which schemes would survive and which won’t, it is important to take into account the returns of all the schemes that were there at the start of the period and then arrive at average returns. This is called survivorship bias free returns.

Reporting the fund performance of the industry, SPIVA Scorecards account for the entire opportunity set—not just the survivors—thereby eliminating survivorship bias.

In the last 3 years, over 90% of the indian equity mutual funds have underperformed their respective benchmarks making a strong case for investing in low cost ETFs for the long term.

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