Methodology: How we review the Mint50 list
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We use a mix of quantitative and qualitative parameters to shortlist schemes. Mint50 is a list of equity and debt schemes. We leave out liquid schemes because they are meant for very short-term needs and are a parking spot for money till it gets deployed. We also leave out long-term bond and government-securities schemes as they are seasonal and their fortunes can change swifty depending on government actions.
We use data and star ratings assigned by Value Research, a mutual funds tracking firm. The firm ranks schemes across categories on the basis of risk-adjusted returns and assigns star ratings to them: a 5-star fund is a higher-rated fund and 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 value to your portfolio.
It also pays to see the kind of risks that the fund takes. Some risks are quantitative and therefore they can be mathematically arrived at. Some of the other risks are qualitative and we need to know the fund manager’s strategy to be able to understand them. Among the former is something called downside risk, which 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 negligible risk and gives modest returns. So, besides performance, Value Research also looks at the downside risk.
A risk-adjusted return is arrived at by deducting the downside risk from a fund’s return. Typically, higher the risk-adjusted return, the better is the fund, because it shows that the fund has given average to above-average return with lower risk.
Why does Mint50 go beyond star ratings? 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’s where Mint50 comes in. Once we ran the basic list of 3-star rated schemes (in our initial process in January 2010 when we had started Mint50), our qualitative checks took over. We run checks such as a study of portfolio strategies, how fund managers manage their schemes, their pedigree and 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 here on. Detailed chats with fund managers is a must before a scheme enters or exits Mint50. As far as past returns are concerned, we give more importance to a scheme’s rolling returns instead of just point-to-point returns. When you take only two points to compute returns, you ignore the fact that investors enter and exit at all points in time. Moreover, the volatility between these points also gets ignored. Since Mint50 is already in existence, this exercise is an audit of existing schemes: which ones should stay in Mint50 and which ones should move out. For new additions on the debt side, we ignore star ratings. For other schemes, star ratings play a negligible role.
A scheme may move out because either it did badly or there is a better alternative outside Mint50. When we started Mint50 in January 2010, 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. This is because when we picked a scheme, its rating must have been good but because its fund strategy may not have worked well in the present markets, its performance may have suffered. We keep a close watch on such schemes and may recommend a temporary halt in fresh investments. A dip in performance could also be temporary because of a temporary change in strategy and therefore a reclassification of its category, and therefore new sets of schemes to compare its performance against.
We hope, and aim, to have as few changes as possible because we hate to churn the Mint50 list. If we tell you to stay invested for long , it’s only logical that we do that too.