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Business News/ Mutual-fund / Mint-50/  Methodology of Mint 50
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Methodology of Mint 50

We use a mix of quantitative and qualitative parameters to shortlist schemes

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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 they are meant for very short-term needs as a parking vehicle for money till it gets deployed. We also leave out long-term bond and government securities schemes as they are seasonal schemes and their fortunes can change swiftly depending on government actions.

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 rated lower. 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. 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 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, as it shows that the fund has given average to above-average return with lower risk.

But Mint50 goes 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 into 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 (and higher) rated schemes, we run qualitative 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 believe are best suited to perform. Detailed talks with fund managers is a part of the process before a scheme enters or exits the list. As far as past returns are concerned, we give more importance to a scheme’s rolling returns (we use three-year 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 a series, this exercise is an audit of existing schemes—which ones should stay in the portfolio 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 Mint50 was started in January 2010, we promised to give you a list of schemes that would do well over the long term. Most of these 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 current 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. If we tell you to stay invested for long, it’s only logical that we do the same.

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Published: 02 Feb 2015, 12:11 AM IST
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