Mint50: Methodology

We use data and star ratings assigned by Value Research, an MF tracking firm. The firm ranks schemes across categories on the basis of 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 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, 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. In the former category is downside risk, which measures—to put it simply—a fund’s excess returns on the downside over a risk-free rate, typically a debt scrip that carries zero 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 is where Mint50 comes in. Once we have the basic list of schemes rated 3-star and above, we run our qualitative checks such as a study of portfolio strategies, how fund managers manage the schemes, 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 hereon. Detailed chat 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, 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 the list 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 in January 2010, we promised to give you a list of schemes that we thought would do well over the long term. Most of the schemes would be on track, but some would go astray. You may notice a scheme whose star-rating has dropped below three stars. This is because when we picked this scheme its rating must have been at least three stars, 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 drop in rating could also mean a temporary change in strategy and, therefore, a reclassification of its category.

We hope—and aim—to have as few changes as possible because we hate to churn the Mint50 list. If we advise you to stay invested for long tenors, it’s only logical that we do that too.

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