How to use the Mint50 list
Though there are 50 schemes that we think are investment worthy, we’re not telling you to buy all. The list simply narrows down your choices. A good portfolio need not have more than seven to eleven schemes across fund types and asset classes.
Decide what your debt and equity allocation is going to be. Assuming that you will invest Rs100 in equity, split that money across a core and satellite approach. The core schemes are your rock-solid, long-term performers that come with a good track record. In these, you would expect to stay invested for a long time. Depending on your risk profile, this should take about 60-70% of your portfolio. The satellite portion can be used to add the returns kicker or a flavour to your portfolio like thematic or infrastructure funds, or the funds that show a promising track record but are relatively new.
If you are starting to invest afresh in equity funds, start by putting money in schemes that invest significantly in large-cap scrips and then later diversify into mid-cap funds. Ideally, you should have two to three large-cap-oriented schemes, including multi-cap funds that invest in scrips across market capitalization; up to two mid- and small-cap schemes; and one, or maximum two, tax-saving equity funds.
Only then, if you have the risk appetite and want a returns kicker, go for thematic and sector funds. You could also have a couple of short-term bond funds for your short- to medium-term goals. Make sure that before you start investing using Mint50, you have an emergency cash corpus. Ideally, have about 3 months of expenses as your emergency cash and stash it away in a mix of liquid funds, which are accessible instantly, and short term debt funds.
Why schemes exit Mint50: If you had invested in a Mint50 scheme earlier and cannot find it here now, there could be two reasons for it. Either something went wrong with the scheme to merit its ouster or a new scheme made a compelling case to be added. While we try to ensure that minimum number of schemes go out, some of the 50 calls we make at the start of the year are bound to go wrong. Which is why we tell you to diversify, even within a category.
Are schemes outside Mint 50 bad? Don’t worry if schemes in which you have already invested are not a part of Mint50. Not all schemes that are outside Mint50 are bad. Just because your existing scheme is not a part of Mint50, does not mean you must sell it. See if it is doing a bit better than the broad market index or its own benchmark index and what this trend has been for the past few years. If you find that your fund has underperformed, go ahead and redeem and then choose out of Mint50.
How to interpret portfolio turnover and duration: Two other data points should interest you. For equity-oriented schemes, we have given portfolio turnover. To put it simply, it tells you the extent to which your fund manager churned the portfolio in the past 1 year. It’s calculated by taking the lower of the sale or purchase (in terms of value) and dividing it by the total net assets of the scheme. Typically, a turnover ratio of 100% means that the fund manager has churned the entire portfolio, at least once in the past year. Ideally, lower the turnover ratio, longer the fund manager is said to have held the stocks, thus showing conviction. But some schemes make it their strategy to churn the portfolio frequently. They claim that since large-sized companies are tracked by many, frequent churning gives them an edge. There is nothing wrong in a strategy as, at the end, everything boils down to returns. But ideally, pick a fund whose turnover ratio is lower. It just shows more conviction and less momentum.
For debt-oriented schemes, we have given their ‘duration’. Interest rates and bond prices move in opposite directions. A good measure to look at your fund’s sensitivity to interest rates is its modified duration. Most fund houses disclose this in their monthly fact sheets. Expressed in years, this number will tell you how much your debt fund would get affected if interest rates (your bond fund’s yield) were to move up or down by 1%. Typically, long-term bond funds have a higher modified duration and vice-versa.
Active versus passive: Also remember, mutual fund data tracking firm Value Research pitches active and passive funds in the same category. Hence, it is possible that passive funds such as UTI Nifty Index Fund and ICICI Prudential Nifty Next 50 index fund show lower returns than actively managed funds. Typically, in sharp-rising markets, passive funds underperform actively managed funds. This doesn’t matter because a passively managed fund’s mandate is never to outperform the index, but to mimic it.
Why are some schemes flagged? A red-flagged scheme or category indicates a high-risk, high-returns option, for example thematic like infrastructure funds. Only investors who have a high risk appetite should opt for such schemes.
Be careful: An orange flag indicates warning. Either the performance has slipped because of a slump in performance as the fund’s strategy may be punished by the markets, or the scheme is at a stage where we think additional investments are not warranted. The reason these funds continue in Mint50 is because we still believe in their fund management. But we aim to watch them very closely. Fresh investments (except ongoing systematic investment plans), therefore, should be avoided. Existing investments must continue, though, till we are convinced the scheme should exit Mint50.