Calculating MF Rankings

Q. While replying to an enquiry in your column ‘Financial Guidance’ in DSIJ issue dated 9th May 2010 under ‘Portfolio for Sons’, you had opined that equity funds of choice are HDFC Equity Fund and BSL Frontline Equity and debt funds of choice are Templeton Income Opportunities Fund. I am sure that advised schemes must be safer and best as you are the expert in the field.

DSIJ provides Mutual Fund Databank every fortnight wherein they inform various equity fund schemes rank-wise taking into consideration the scheme’s fund size, NAV, etc. for 3 months, 6 months, 1 year, 3 year and since inception of the schemes. According to them Sundaram Select Midcap, DSP BlackRock Top 100 Equity Fund, HSBC Equity Fund, ICICI Dynamic Plan and Birla Dividend Yield Fund are the schemes holding first five ranks.

Kindly advise me whether I can consider these five ranked schemes are the best equity schemes for investing safely in terms of best returns at the present.

- Sachin H., on email

A. Sachin, I am happy that you are doing some home work before making investment decisions! In general, investors who are aware of their actions perform better than others, unless they are with good investment managers.

The methods used to rank are different. In the case of the DSJ mutual fund databank, the only criteria used to rank is the returns. There are ranks assigned for different time periods – 6 months, 1 year, 3 years and since inception of the scheme. The last column which ranks HSBC as #1 is based on the returns since inception. But the time periods in this column would vary from scheme to scheme and are strictly not comparable. If you would consider the same scheme in the 3-year column which is uniform across all schemes, the ranking is different. A deeper analysis will actually show that the returns’ ranking of this fund has been falling over time, meaning that it did well earlier and not so well later.

The way I analyze performance is different. After evaluating qualitative aspects of the fund management such as ethical practices, consistency of philosophy, etc., I analyze the filtered set for returns. Here too, I give importance to the quality of returns. If someone is taking a higher risk for the return delivered as compared to another who has delivered a similar return by taking a lesser risk, I will favour the latter. Technically, this is called risk-adjusted returns. I give importance to the consistency of performance over different time periods. A flash in the pan performance is not good for me. The fund should have delivered across medium and long periods of time and remained in the top quartile of performers. Funds have different characteristics as regards risk. Some are less risky (less volatile, more predictable) and some are more risky (volatile, unpredictable). I would categorize Dynamic and Dividend Yield as less risky.

So whereas a simple returns ranking shows some information, a ranking based on risk and returns will be more consistent.