Why should a business paper get into the business of short-listing investment-worthy mutual funds? I ask this question, not from the readers’ point of view, but from our own. The whole thing is fraught with problems that make the final list almost not worth the effort. First, what if despite the hard work of putting in place number-based filters (returns, risk and portfolio characteristics) and then making the shortlist of funds jump through the qualitative hoops (that includes talking to the fund managers and other information sources), some of the funds that get on the list mis-fire? That you end up with egg on your face is a minor problem, the bigger issue is that it affects real money of real people who have trusted you. While there is no foolproof way to give a 100% risk-free portfolio without it being only made of government securities, we do recommend holding at least two funds from each category to reduce the risk of a particular scheme malfunctioning due to factors beyond reasonable control. Therefore, diversification across asset classes, within asset classes and across fund houses is recommended.
Second is the accusation hurled periodically of there being a conflict of interest and that somehow the paper would have been paid to put some funds in the investment-worthy basket. It is understandable that faith in the twin professions of finance and journalism is at an all-time low and that to doubt the intention and outcome of a list of investment-worthy funds is not unreasonable. Specially when media houses get into broking and selling funds, the moral high ground begins to disappear for the entire profession. But neither does Mint get a significant share of the mutual fund advertising pie nor is there any other way that the paper or the journalists get compensated by the funds. The way we deal with such issues is to put in place a fully-disclosed methodology that has both the data-driven rules for shortlisting of funds and the more subjective—or qualitative—ones. This year we have changed our process and have outsourced the data work to CRISIL Research. The filters were developed by Mint, CRISIL Research has done the data crunching to throw out the league tables.
Third, what do you do when regulations make deep changes in the way funds are categorized and their asset allocation, and you are compelled to rework the basket completely, making it necessary for investors who have gone by the list to change their portfolios? This is one such year where we have had to make deep changes in the list of funds. We have gone back to a short list of 50 funds, from the 30 we had reduced to last year. We have changed the methodology, process and data vendor. Also, regulatory changes in the fund categories changes have now settled down allowing us to choose the schemes according to the new classification. The big changes you see in the fund names are largely due to these reasons. Since capital gains till 31 January 2018 have been grandfathered and the markets have remained low key since then, a switch will not cost you much.
These are the reasons why doing such a list is a big risk for us. But remember that I had said “almost not worth" the effort at the top of the piece. It is worth the effort because Mint is proud to hold the banner of an unbiased reporter and analyst who works for the reader and not the advertiser. It is worth the effort because it gives us a much deeper insight into the ₹24 trillion mutual fund industry, half of whose assets are retail, with the systematic investment plan (SIP) over ₹8,000 crore, or almost at ₹1 trillion a year and growing. Though Sebi has been a very proactive regulator and has constantly changed the rules of the game, there is still space for unbiased third-party league tables that suggest schemes or validate decisions taken by investors themselves of their financial planners.
I do hope you find this list useful and do write into us with comments and suggestions.
Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation