Mint50 is now trimmed down to Mint30

Mint50 was created in 2010 as a basket of 50 curated investment-worthy mutual fund schemes for an average retail investor, who would pick 5-8 schemes to build her own portfolio. We chose a basket of 50 to accommodate the various fund manager styles and mandates under the broad categories. The categories were loosely defined and a single category could have three to four different flavours under its umbrella. For example, the large-cap category had pure large-cap funds like Franklin India Bluechip Fund and also those with a mid-cap flavour like Aditya Birla Sun Life Equity Fund. We usually preferred two options for each of these flavours, bumping up the number of options we needed to have.

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This changed on 6 October 2017 when capital market regulator Securities and Exchange Board of India (Sebi) rolled out its new list of 36 defined fund categories. This has resulted in sharper categories and a wider variety within a category is now not possible. So while large-cap funds can still have mid-cap stocks, the limit is defined. And so is the definition of what are large-cap, mid-cap and small-cap stocks. Fund houses were told to re-classify all their schemes into these 36 categories and keep only one scheme per category. As a result, duplicates have been eliminated and all schemes within a category have got a level-playing ground to choose stocks. Comparison between two or more funds in a single category will be easier, going forward.

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This change has made us rethink our list of funds as well. We’re going from a list of 50 funds to a short list of 30. Here’s why:

■ Fifty funds worked well when there was clear differentiation in strategy for each fund regardless of their category.

■ Post reclassification there is greater standardisation within a category. This means each fund in the category has the same stock selection universe and rigid guidelines on market cap allocation. Earlier, two mid-cap funds could have had a different definition of what constituted a mid-cap scrip. Invesco India Mid Cap Fund used to define a mid-cap stock as one whose market capitalisation is less than that of the last stock of Nifty 50 and more than 5% of the market cap of the last stock of Nifty 50. HDFC Mid-Cap Opportunities had defined a mid-cap stock as one that is either present in the Nifty Midcap 100 Index or whose market cap is ₹500 crore or more but does not exceed the market cap of the largest constituent of the Nifty Midcap 100 Index. Now, Sebi has defined a mid-cap stock as a company that is ranked between 101 and 250 (both included) in terms of market cap. This is likely to bring standardisation in product structure and as a result similarity in the outcome—hence it doesn’t make sense to have too many choices in one category.

■ The large-cap category, specifically, will be restricted for stock selection. That is because a large-cap stock is now defined and a set of 100 companies is finite when you look at funds that typically have 60-70 stocks. This is a category that we will keep a watch on closely because we believe that the alpha, or the extra return over the benchmark that a fund manager earns, is under pressure in a large-cap. In addition, mandatory benchmarking to total returns index makes it tougher for large-cap funds to beat their benchmark indices. We have reduced our large-cap offering, but we could shrink it further going ahead. The case for a broad market index exchange-traded fund or ETF just got stronger.

■ Reclassification has also increased the number of distinct categories and individual funds have moved around. ICICI Prudential Dynamic Fund, a diversified equity fund, became ICICI Prudential Multi Asset Fund and now sits in the multi-asset category. HDFC Prudence Fund, an erstwhile balanced fund, is now HDFC Balanced Advantage Fund and now sits in the dynamic asset allocation category.

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These categories have very wide mandates that give several options to schemes to pick strategies. For instance, how do you compare a fund that holds 40-60% in equities and another that holds 20-80%, even though both are in the dynamic asset allocation category?

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The same is the case with multi-asset allocation fund that allows funds to invest at least 10% in three asset classes. Two funds with different strategies could have their own rationales because they would have different objectives and risk appetites. Both are justified; which one should you pick? What’s worse; it’s unfair to compare such varied funds with a single benchmark index. That’s the dilemma of having such categories in Mint30, a list that caters to investors with varied risk profiles, tastes and objectives. We leave out categories like contra funds for the same reason. Sector funds and focused funds are left out too since these are very specialised funds that cater to a select audience.

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We have kept the categories that are needed for a basic mutual fund portfolio and left those that are either difficult to benchmark or are not central to an average portfolio.

There has been a big change in the ₹23 trillion Indian mutual fund industry. Taking note of that, we too have changed by reducing the size of our basket of funds from 50 to 30. Welcome to Mint30!