The Ulcer Index is a measure of draw back threat in actively managed mutual funds. It’s a easy option to learn how irritating it’s to carry a fund in comparison with a benchmark. Buyers could make the evaluation proven utilizing the instruments within the freefincal investor circle (particulars under).
Context: The usual deviation (volatility) is a measure of deviations from a median (month-to-month) return. Each constructive and unfavorable deviations are accounted for. Nonetheless, since a constructive deviation from a median implies a better NAV, it isn’t a ‘dangerous’ factor. So why penalise it?
So the Ulcer Index is outlined equally to a normal deviation, however is predicated on drawdowns (fall from a peak) as an alternative of deviations from a median.
Suppose the utmost NAV over 2 weeks is Rs. 15 per unit. If the NAV decreases from this most, the Ulcer index worth will increase, indicating a rise in investor stress. If the NAV will increase additional, the index decreases, reflecting a lower in stress!
The Ulcer index is designed in such a method that it penalises draw back (fall from the utmost) way more than different ratios. Peter Martin and Byron McCann first printed it of their e book The Investor’s Information to Constancy Funds (1989).
Peter Martin describes the index on his web page: tangotools. The out-of-print e book in PDF type might be discovered right here.
At the moment, just about everybody thought abdomen ulcers had been attributable to stress. We later got here to know that abdomen Ulcers are attributable to micro organism – a Nobel prize-winning discovery. In fact, the identify Ulcer Index caught!
- The autumn from a peak is computed as a proportion change over 90 days. Though that is for much longer than the 2 weeks advisable by Martin, the longer period cuts out noise and ought to be adequate for the long-term investor.
- This proportion change is named a drawdown. We sq. this drawdown.
- We now compute a rolling 90-day drawdown squared and sum all the information.
- The basis imply sq. of this sum is computed and is named the Ulcer Index. The Wikipedia Web page offers extra particulars. This offers the Ulcer Index for a given interval.
- Ulcer Rating: We compute this Ulcer index on a rolling 90-day foundation for every enterprise day for a benchmark and an lively MF, and compute how usually the Ulcer index of the fund has been decrease than that of the benchmark. This is named the Ulcer Rating, additionally known as the rolling 90-day Ulcer index outperformance consistency.
Now, allow us to check out the ulcer index with a couple of mutual funds.
The upper the ulcer index, the decrease the draw back safety and the upper the investor stress. We require a fund with an ulcer index constantly decrease than its benchmark.
Parag Parikh Flexicap Fund vs Nifty 500
The normalised NAV evolution (the noisy traces) is referenced to the correct y-axis. Discover that the blue line (90-day rolling Ulcer Index for the fund) is more often than not considerably decrease than the benchmark. This implies the buyers had been shielded from extreme drawdowns more often than not.
| Period (years) | Ulcer Rating | UI Fund | UI Benchmark |
| 1 | 100% | 3.19 | 7.05 |
| 2 | 100% | 2.53 | 5.78 |
| 3 | 97% | 2.12 | 5.21 |
| 4 | 78% | 4.46 | 5.76 |
| 5 | 80% | 4.03 | 5.30 |
| 6 | 79% | 5.40 | 7.53 |
| 7 | 83% | 5.04 | 7.16 |
| 8 | 85% | 5.20 | 7.18 |
| 9 | 87% | 4.89 | 6.76 |
| 10 | 86% | 4.88 | 6.69 |
The Ulcer Index of the fund has at all times been decrease than the index. The Ulcer Scores (rolling 90-day Ulcer index outperformance consistency) have been fairly excessive for all durations thought-about. This can be a large efficiency, and it’s no shock that this fund is an investor favorite. The fund has additionally constantly outperformed the index.
As readers know, I’m an NFO investor on this fund (a mix of luck and accident, not ability or analytical potential), and a good portion of my retirement corpus is invested right here. This marks 17 years of mutual fund investing: My Journey and classes discovered.
Aditya Birla Sunlife Midcap Fund vs Nifty Midcap 150
Discover how the fund has sometimes been as irritating to carry because the index and infrequently extra irritating! This reveals in its efficiency!
Between January 1, 2013, and Sep 17, 2025, there are 1896 5-year rolling returns. The fund has solely outperformed the index 88 out of 1896 instances. Thus, the rolling return outperformance consistency over seven years is 88/1896 = 4.64% indicating poor efficiency (the corresponding rating for the Parag Parikh Fund is 100% as of Sep 2025). You’ll be able to see the Ulcer rating for the midcap fund within the screenshot under.
The ulcer index offers you insights into the draw back safety historical past of a fund. That is crucial attribute of an actively managed fund. I strongly imagine draw back safety is essentially the most dependable supply of outperformance – Unusual, however true! How mutual funds beat the index! For those who want actively managed mutual funds, use the Ulcer Index to find out if the additional payment is definitely worth the decrease stress and constant outperformance.
How one can compute the Ulcer Index?
The freefincal mutual fund analyser, part of the freefincal investor circle, has a devoted Ulcer Index computation web page. This can be a screenshot. This can be utilized to generate the graphs and desk proven above.
The mutual fund analyser additionally offers rolling returns comparisons (fund vs. benchmark for lump sum and SIP), rolling volatility, upside and draw back seize, XIRR monitoring of an funding journey, and far, way more – it’s a Swiss military Knife for mutual fund evaluation.
The freefincal investor circle is an unique house for DIY buyers, advisors, fintech workers and college students to entry 23 monetary planning and insurance coverage instruments, mutual fund and inventory evaluation instruments, coding methods and Excel macros for information extraction. 500+ members at the moment are a part of our investor circle. You get lifetime entry to a number of distinctive instruments (together with new additions and bug fixes), and a dialogue discussion board
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