To rank mutual funds simply by highest past returns is an easy exercise and one that is likely to find the most interest—after all, investors want high returns—but it is not something that needs as much attention as a deeper evaluation of the funds in your portfolio does. This involves looking at consistency of returns, risk that the scheme carries, how it performs when markets are down, portfolio composition, good hygiene practices followed by the fund house and fund manager competency. Mint50, a curated basket of investment-worthy funds, is the result of an exhaustive exercise that blends in various parameters with the aim of getting you the best combination of risk and returns. Therefore, the schemes in this list may not be the same as the ones that top the return league tables for the past year since these do not take into account parameters of risk and other features.
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Our attempt has been to bring out a list of funds that can give you enduring outcomes. We did four things.
One, we used past performance as the start point for the exercise and then tried to understand if this performance is sustainable. We looked at the appropriate rolling return numbers—three years for equity-oriented schemes and one year for debt-oriented schemes—to make sure that the return performance captured the journey of the fund over the period and not just at one point. For example, if you pulled up the list of best-performing equity schemes in the mid-cap category on a one-year return basis, the L&T Midcap fund comes at the bottom of the table. But on a three-year rolling return basis, which we used, the fund is the top performer. A look at the long-term performance of the fund shows that it is a top-quartile fund in the three-, five-, and seven-year return periods. For equity-oriented funds, we went a step further, and looked at the active returns of the schemes, that is, the returns that a fund generated in excess of the benchmark. Actively-managed funds have to justify the fees that they charge.
Two, we went beyond returns to look at fund portfolios to understand how the returns were generated. We leveraged the expertise of our data partner, CRISIL Research, to score funds on features such as exposure to sensitive sectors, liquidity in the portfolio and asset quality, beyond just the credit rating profile, portfolio concentration, and others so that we were able to zero in on funds that not only passed muster in terms of returns but also on the robustness of their portfolios. The debt schemes of IDFC Mutual Fund, for example, consistently came up on top in asset quality, as did the equity schemes of Mirae Asset on sector and company concentration.
Three, we blended in the risk metrics to see how funds performed under the pressure of poor markets and external events. There are risks inherent in all investments and, if ignored, have the capacity to derail your entire plan. A large part of managing an investment portfolio is about mitigating these risks. For example, schemes in debt fund categories like low duration funds may choose not to hold securities with tenors greater than five years so that the risk of volatility is mitigated in situations of rising interest rates. The Securities and Exchange Board of India’s (Sebi) re-categorization of schemes has made it easier to anticipate the extent of volatility in a mutual fund product.
Four, we went beyond numbers and looked at qualitative factors by speaking to each fund manager and collecting non-data-linked information. For example, the fund managers of Aditya Birla Sun Life Tax Relief 96 are conscious that its investors may be first-time equity investors more comfortable with traditional debt-oriented tax-saving products and, therefore, aim for stability in returns.
We culled out important principles that fund managers adopt in managing your money that are equally relevant at a personal finance level. Here is how you can apply these to your own portfolio.
Select scheme categories that are suitable for your investment horizon. For example, in debt funds, you manage volatility by ensuring that the period for which you are investing is more than the prescribed duration for the category of funds. So, your choice of a low duration fund should be for investing money that you need not earlier than nine months. And funds will, typically, keep the duration of the portfolio below this level. Or, your mid-cap investments should be for goals that are more than five years away.
Not all funds are the same even within a category and the last thing you should do is to look at point-to-point return ranking and decide to go with the fund ranked first. This is not to say that the best return performer is a bad fund, but that it is important to ensure suitability beyond returns. An HDFC Top 100 may be the pick for an investor comfortable with staying with a concentrated portfolio, while a Mirae Asset Large Cap fund that is diversified across sectors, themes and stocks, may be a better fit for an investor who does not have the stomach for long troughs. Or, a debt fund that runs a higher duration than its peers may not be the right fit for an investor looking for a steady ride. Look at the portfolio features to determine the source of a fund’s returns. When the going is good, the less suitable features may not appear to matter too much. But when the tide turns, there may be significant irritants.
Don’t allow the markets to define your comfort with risk. If a Kotak Standard Multicap fund with its large-cap focus is what gives you comfort, then a run-up in the mid- and small-caps should not make you switch to, say, Principal Multi Cap Growth fund, which has a mid- and small-cap bias. Again, your exit strategy from funds should not be market-focused but, internally, on your goals and the changes in the funds themselves. As goals mature, they should trigger a switch to a more time-horizon appropriate fund. A change in the fund’s mandate or fund management is a trigger for you to pause and evaluate if it warrants an exit.
A robust evaluation and selection framework that balances risk and return in line with the financial needs is what personal portfolios need. Build that framework, test it and fine tune it because managing money is a lifetime exercise. It will help ensure good outcomes will continue and poor outcomes will be checked.
With ₹24 trillion in assets and growing, the mutual fund industry is a big trustee of investors’ money and we found they are conscious of it. Most fund houses have well-defined processes to identify investment opportunities and protocols to help mitigate risks inherent in investments. There may still be errors and oversights. But they will be exceptions. For the most part, you can rest assured that your money is in safe hands.
HDFC Mid-Cap Opportunities, HDFC Small-Cap, HDFC Corporate Bond and HDFC Hybrid funds made it to the shortlist on the basis of their quantitative performance. However, these schemes could not be evaluated at the next stage because Mint did not get access to the fund managers and, hence, had to be dropped.