Out of the 36 categories of mutual funds defined by the Securities and Exchange Board of India (Sebi), we selected 16. Under equity funds, we picked large-cap, large-and-mid-cap, multi-cap, mid-cap, small-cap, value-oriented or contra, equity-linked savings scheme (ELSS) and focused categories. Under hybrid funds, we chose conservative and aggressive categories. Under debt funds, we picked liquid, ultra-short duration, low duration, short duration and corporate bond categories. We also included the international funds category.
Schemes that met two requirements were eligible. 1) Those with NAV (net asset value) history of at least five years (equity, hybrid, short duration and corporate bond) and three years (liquid, ultra-short duration and low duration). 2) Schemes with AUM (assets under management) that fell in the 98% percentile. Except for funds with very small AUMs, all others came into the evaluation bucket.
Funds which had totally different portfolios before Sebi’s re-categorization of schemes in 2018 were excluded because the change makes tracking past performance futile.
At the first stage of evaluation, all eligible schemes were put through a quantitative test of their past performance, and at the second, we looked at the qualitative aspects.
Our data partner, Quantix, CRISIL’s data and analytics platform, ran the numbers and generated the report cards for quantitative evaluation. The parameters were return, risk and portfolio characteristics.
We used rolling returns to evaluate performance and standard deviation of rolling returns as the risk measure.
The period of analysis was five years for equity and hybrid and three years for debt funds. This was broken into four overlapping periods. Each of these was given a progressive weight in a way that recent performance had greater representation, but long-term performance wasn’t ignored.
For portfolio characteristics, we looked at industry and company concentration, liquidity, asset quality, portfolio turnover, cash holdings and modified duration (MD), if applicable, to understand the source of returns and risk.
For equity funds, we calculated the three-year active rolling return, rolled daily for the last five years, and assigned it 50% weight. Active return considers the return of a fund in excess of the benchmark. It shows how well an actively managed fund performed over its benchmark and if it justifies investor fee. Standard deviation was assigned a weight of 25%. Portfolio characteristics, with a 25% weight, included stock and sector concentration, liquidity in terms of the ease with which a portfolio can be liquidated, cash holding and portfolio churn.
For short duration and corporate bond, we took one-year rolling return, rolled daily for the last five years, and gave it 45% weight. Standard deviation got 10%. Portfolio characteristics got 45% and included issuer concentration, exposure to sensitive sectors, liquidity, asset quality and MD. For liquid, ultra-short and low duration, we took one-, three- and six-month return, respectively, rolled daily for the last three years, and gave the parameter 40% weight. Standard deviation got 10%. The portfolio characteristics got 50% and included issuer concentration, exposure to sensitive sectors, number of issuers, liquidity, asset quality and MD.
We increased the weights for asset quality and liquidity for short duration, corporate bond, liquid, ultra-short and low duration categories, given the credit risks prevalent in the economy. These parameters are of greater relevance in funds where the investment period is low and there’s not enough time for the NAV to recover and protect the principal in case of a credit event.
For aggressive hybrid funds, the return and risk measures were similar to the equity funds. A weight of 25% was given to portfolio features.
For conservative hybrid funds, we took one-year rolling return, rolled daily for the last five years, and gave it 50% weight. Standard deviation got 15% and portfolio characteristics 35%. The debt and equity portions were separately analyzed for hybrid funds. For international funds, the three-year rolling return and risk were given 50% weight each.
Once the report card was generated, final scores were assigned. A shortlist was then created for the second level of evaluation. At this stage, Mint reached out to fund management teams of each scheme to understand the strategy, the processes, capabilities and the checks and balances, to arrive at the final list.