Noting past performance, eye on future

Noting past performance, eye on future

Despite equity markets being volatile in 2010, mutual fund (MF) investors made money. In as much as we hate to say “we told you so", if you had invested in Mint50, your chances of making money would have gone up.

A Mint50 multi-cap fund (an equity fund that invests across market capitalization)—for instance—returned 22.16% on average compared with 18.49% by the category average. The best performing equity-oriented fund from the Mint50, a basket of 50 schemes that we carefully curated for you at the beginning of 2010, in the past calendar year was DSP BlackRock Small and Mid Cap Fund, which returned 29.62%. The Sensex gave 17.95% and the CNX Midcap index 19.16% over the same period.

While it is a vindication of our research, each time we do this exercise there are sleepless nights—after all you trust our advice—during the process.

Two things that should help you take this decision with more clarity. One, the funds make the cut purely on merit, there are no invisible tie-ups that nudge us to recommend a fund. Two, we eat our own cooking—the entire Mint team invests out of this list of funds.

Also See

Mutual fund schemes to invest in (PDF)

Fund performance (PDF)

To go back to the first principles, Mint Money believes that for a direct investor to pick investment-worthy schemes out of at least a thousand schemes is no easy task. The lack of trustworthy advisers in the country due to a regulatory gap makes it difficult for the average middle class Indian to get the benefit of managed funds.

Using qualitative and quantitative methods and then using our knowledge of funds, fund managers and investing styles we cull out 50 schemes we think are investment worthy across equity and debt (and even gold as and when the need arises).

This is a list of funds that takes note of past performance but has an eye on what we think the fund will do in the future as well. Do read the package fully to get the full benefit of Mint50.

Mint50 methodology

We use a mix of quantitative and qualitative parameters to shortlist schemes. This is a list of equity and debt schemes; we leave out liquid schemes since it is meant for short-term needs and is a parking vehicle for your money till it gets deployed. Out of a universe of 857 schemes (excluding fixed maturity plans), we filter out all the 3-star and above rated schemes. This reduces the number of schemes to 441.

Effective 2011, we use the Value Research, an MF tracking firm, instead of Morningstar India, another MF tracker. 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 has average to above-average return 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 here on.

Since Mint50 is already in existence—we turn one year old in January 2011—this exercise is an audit of existing schemes; which ones should stay inside Mint50 and which ones should move out.

A scheme may move out because either it did badly or there is a better alternative outside Mint50. When we started Mint50 last year, 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 list. If we tell you to stay invested for long tenors, it’s only logical that we do that, too.

How to use Mint50

Though there are 50 schemes we think that are investment-worthy, we’re not telling you to buy all. The list is there to simply narrow down your choice to a more manageable size. A good portfolio need not go beyond seven to 12 schemes spread across different fund types and asset classes.

First, decide what your debt and equity allocation is going to be. Assume that you will invest 100 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 and you would expect to stay invested in them 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 such as thematic, infrastructure funds or those funds that show a promising track record but are relatively new. If you are starting to invest afresh, start by putting money in large-cap funds and later diversify into mid-cap funds. Depending on your investment amount, 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 two thematic and sector funds.

If you had invested in a Mint50 scheme last year and can’t find it in Mint50 any more, 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.

Don’t worry if your schemes, in which you are already invested in, are not part of Mint50. Not all schemes that are outside of 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, redeem and then choose from Mint50.

MF tracker Value Research keeps active and passive funds in the same category. So, it is possible that passive funds, such as Benchmark Nifty BeES, show a lower Value Research star rating. In sharp rising markets, typically, ETFs and index funds underperform actively managed funds and hence show a lower star rating. But since their mandate is not to outperform the index, but to mimic it, a lower rating doesn’t matter.