Just because there are 50 schemes in Mint50, doesn’t mean you buy all of them. The list is there to simply narrow down your choice to a more manageable one. A good portfolio need not go beyond seven to 12 schemes spread across fund types and asset classes.
First, decide what your debt and equity allocation is going to be. Assume that you will invest Rs 100 in equity, then split that money through a core and satellite approach. The core schemes are your long-term performers that come with a good track record, in which 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 with thematic, infrastructure or those funds that show a promising track record but are relatively new. If you are investing afresh, start with schemes that invest significantly in large-cap scrips and later diversify into mid-cap funds. Ideally, you should have 2-3 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, maximum two, tax-saving equity funds. An additional two-three schemes can be gold funds or perhaps a thematic or sector fund, but only if you can stomach the risk.
If you had invested in a Mint50 scheme earlier and can’t find it in the list anymore, there could be two reasons. Either, something went wrong with the scheme to merit its ouster or a new scheme made a compelling case to be added. While it is our endeavour to ensure that a 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 scheme outside Mint50 bad? Not all schemes that are outside Mint50 are bad. 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.
Also remember that Value Research pitches active and passive funds in the same category. Hence, it is possible that passive funds, such as Benchmark Nifty BeES, Kotak Sensex ETF and so on, show a lower star rating. In sharp rising markets, typically exchange-traded funds and index funds underperform actively managed funds and hence show a lower rating. But since their mandate is never to outperform the index, but to mimic it, a lower rating here doesn’t matter.
The main purpose of Mint50 is to give our readers a choice of 50 schemes that are investment worthy. But remember, do not buy all 50. We aim to give you a choice across fund houses and styles so that you can pick and choose those that best fit your needs. Ideally, your portfolio should have 7-12 schemes.
We restrict this curated list to equity and debt schemes and leave out liquid schemes since these are meant for short-term needs and is more of a parking vehicle for large-ticket money rather than a useful alternative to a savings deposit. Out of a universe of 787 schemes (excluding fixed maturity plans and liquid funds), we filter out the 3-star and above rated schemes. This reduces the number of schemes to 274.
Next, we use a mix of quantitative and qualitative parameters to shortlist schemes from this universe. We use Value Research, a mutual funds data tracking firm, to get the data and their star ratings. Value Research ranks schemes across categories on the basis of their risk-adjusted returns and assigns star ratings to them. While a 5-star fund is a higher rated fund, a 1-star fund is a lower-rated fund. Star ratings are assigned because the variance between two ranks can be statistically insignificant. For instance, two schemes ranked fifth and seventh may add the same amount of value to your portfolio.
Star ratings depend on a fund’s risk-adjusted returns. It also pays to see the kind of risk the fund takes. Some risks are quantitative and, therefore, they can be mathematically arrived at, while few others are qualitative and we need to know the fund manager’s strategy to be able to understand them. Among the former is a number called “downside risk” that measures—to put it simply—a fund’s excess in returns on the downside over a risk-free rate, typically a debt scrip that carries zero risk and gives modest returns. Therefore, in addition to performance, Value Research also looks at the downside risk.
A risk-adjusted return is a fund’s return that is arrived at by deducting the downside risk from its return. Typically, higher the risk-adjusted return, better is the fund because it shows that the fund gives average to above-average returns with lower risk.
Star ratings are a good indication of how schemes have performed in the past. Ultimately, it is a report card that gives a good insight about a fund’s past, but tells little about how the fund is poised to do in the future. That is where Mint50 comes in. Once we have the basic list of 3-star rated schemes, we run our qualitative checks such as a study of portfolio strategies, how fund managers manage their schemes, their pedigree, performance in rising and falling markets to be able to cull out a list of 50 schemes that we feel are best suited to perform.
Since Mint50 is already in existence—we turn two in January 2012—this exercise is an audit of existing schemes to decide which funds stay in and which move out. A scheme may move out because either it did badly or there is a better alternative outside Mint50. When we started Mint50 two years back, we promised to give you a list of schemes that we think would do well over the long term. Most of the schemes would be on track, but some would go astray.
We hope—and aim—to have as few changes as possible because we hate to churn the Mint50 portfolio. If we tell you to stay invested for long tenors, it’s only logical that we do that, too.