A Risk Analytics & Data Science based platform for retail investors in Indian Financial Markets
AMFI (Association of Mutual Funds in India), an industry association body comprising of all major asset management companies, observed that MF Industry’s total AUM (Assets under Management) has grown from ₹5.05 trillion as on 31st March, 2008 to ₹22.86 trillion as on 30th June, 2018, experiencing 4.5 times growth in a span of just 10 years. There are a total of 74.6 Million account holders with almost 90% of them in Equity, ELSS or Balanced schemes. Overall, this is a very good development for retail investors who had very limited meaningful investment options until recently. But, the daily dose of market news, expert opinions and technical indicators based predictions that we see everywhere on TV, newspapers and social media could be overwhelming and stressful, leading us to make irrational decisions.
Wouldn’t it be refreshing if we have a completely data-driven systematic investment analysis and management platform that is backed by decades worth of investment theory supported by real empirical evidence? Vesp analytics is one such platform developed to do just that with the hope that regular retail investors can tune out all the unnecessary noise and just focus on fundamentals that drive long-term Investment returns.
VespAnalytics is intended to be a self-service platform providing transparent and custom Investment analysis & Portfolio construction solutions grounded in sound principles of long-term investing and risk management.
In the rest of this article, let’s go over this by answering a series of common investors questions.
There are thousands of Stocks and Mutual Funds to pick from and it is overwhelming to pick the right ones based on my desired investment goals and objectives. Is there a different way of narrowing down my choices?
Returns, Volatility and Maximum Drawdown for different time periods can be used as primary Risk/Return characteristics of an investment to help filter down the entire universe of mutual funds and stocks to arrive at a smaller subset that can be further analyzed in detail.
Try it out by going to http://vespanalytics.com/mf_select for mutual funds (please allow for a few seconds for the page to initially load)
Similarly for stocks, go to http://vespanalytics.com/stock_select.
If you are not sure what these terms really mean, please feel free to click the “question mark” icon next to the field for a detailed explanation and how to interpret the value.
The last few years have been great for stock market, but i am always worried about when the next major market meltdown will happen and how will it impact my investments.
None of us want to be in an unfortunate situation where we ended up investing in a stock or mutual fund at exactly the wrong time (its peak) and from then on, horrified to see its value nosedive to reach a bottom (trough). Maximum Drawdown (MDD) is a measure of how much in % the investment has fallen in value from that peak to the trough. For those who have endured the last major global financial crisis in 2007–2008, that’s exactly the type of situation when most of the funds or stocks would experience their MDD.
As part of analyzing a selected Mutual Fund or stock, one can review its MDD either in its entire lifetime (or up to whenever we have data available from) or for periods like the last one month, six months, one year or five years.
The overall mutual fund or individual stock’s performance characteristics are somewhat clear and easy to understand, but i am having a hard time to figure out how it would look like for my short-term investment needs and how to set my expectations accordingly.
Over the long run (over decades), there is a high likelihood that returns from a well diversified fund or a large-cap stock will be higher than many other alternate investment options that share a similar risk profile. But, one of the major challenges that many investors face is — we can’t afford to wait for that long, at least for some of our investment goals. Especially the ones tied to important life events like saving for a house down payment or paying for kids college tuition. As a result, we start to worry about what’s the expected returns or worst possible losses that one could incur over the next three months, next year and such shorter time periods. That way, we can make better decisions and plan accordingly.
To answer such questions, we can select the specific mutual fund or stock and analyze its aggregate returns for different time periods across its entire history and also their distributions.
First chart on the left shows the distribution of the stock’s or mutual fund’s aggregated returns for different time periods (daily, weekly, monthly, quarterly and yearly). For e.g., with “weekly” period selected, each bar height shows the number of weeks when the stock experienced a return within the bar’s range (x-axis). The one’s to the far left, gives a good indication of the number of weeks the stock experienced some of its worst losses. VaR (Value at Risk) is another good way of expressing worst possible losses with a certain degree of confidence. if 90% VaR is selected, it implies that there is a 90% chance that the stock or mutual fund won’t incur losses worser than the left most “blue” line. But, on the other hand, there is a 10% chance that the losses could be equal or greater than the red lines. Feel free to try-out this for different stocks and mutual funds, the charts can be zoomed in, zoomed out for more detailed analysis.
Second chart on the right, shows the same returns aggregations, but over time from left to right. If one wants to see how the broader market performed during the same time periods, enable “sensex” option to see Sensex index’s returns overlaid on the same chart.
I am always intrigued by the daily market, macro-economic and global news and the most immediate question that comes to mind is — how does each of these decisions/news events impact my individual investments?
Different stocks and mutual funds move differently based on the market news, global macro-economic factors like crude oil prices, GDP numbers, unemployment, currency rates fluctuations etc… For e.g.: stocks in the energy sector or their sector specific Mutual Funds tend to closely move with crude oil prices and key OPEC decisions. Similarly, stocks and mutual funds within consumer industry tend to move more closely with broad economic indicators like GDP, unemployment rates etc… that reflect financial well being of consumers.
To start with, we can analyze how closely each stock or mutual fund is related to three different indicators — crude oil prices, Sensex market index and US Dollar to Indian Rupee exchange rate.
As an example, for the selected mutual fund or stock, we can scroll down to the “Macro-economic factors correlations” section to view the color coded heat-map for these three factors. The closer it is to blue color, it’s more closely related to the macro-economic factor. On the other hand, if its closer to red, it indicates that they are not that closely related. Click on the color bars to see the joint movement of the fund/stock with that macro-economic indicator over time.
Wrap up
Feel free to select, explore and analyze mutual funds or stocks that is of interest to you. We will all be better off if we can tune out noise (marketing speak, opinions, predictions without much basis) and instead make data- driven informed decisions. Vesp Analytics aims to provide just such a platform.
