MF Data Bank : Announcing Version 2.0 of MF Ranking Methodology

Announcing Version 2.0 of MF Ranking Methodology

It is almost one year now that we pioneered a way of analysing mutual funds that predicts future returns of the funds based on its underlying portfolio holding. This future prediction is based on DSIJ's view on each stock held by the mutual fund scheme and assumes that the portfolio of the fund is not altered during the tenure. We are happy to inform you all that this revolutionary way has predicted the future returns with a fair amount of accuracy and has been very well accepted by the industry and readers. Over the period, we have tweaked and refined this model to make it more accurate. In the short run, we have found that there is high correlation between our expected returns assigned to the fund and the actual returns generated by them. We leveraged our legacy of more than 30 years in understanding the equity to come out with such innovation. The need for such futurelooking rankings became obvious, especially after market regulator SEBI came out with the categorisation and rationalisation of schemes that made the existing rating systems almost redundant. This is because all the ratings done were based on past returns; however, with the SEBI circular, huge churning in portfolio would have made these ratings irrelevant. 

We are glad to launch the version 2.0 of our MF ranking with this Anniversary Issue, wherein we are also introducing a 'risk' parameter to guide the investor on the scheme's risk. Another parameter that we will be shortly adding is the turnover of stocks in the fund. This factor will give an idea of typically how much the stock in a particular scheme changes during the course of the year. Hence, version 2.0 ranking of our MF data brings in three parameters, which together will provide the much-needed insight into the expectation from a given fund. First, the 'rank' will give you the potential return of the funds in the next one year. Second, the 'risk' will give an idea of the caution that the investor should take before investing in the funds. Third, the 'turnover' will give you an idea of how much the expected returns can change from its predicted value. The larger the turnover, the larger the deviation one can expect.

What is new about our 'risk' parameter?

Extending our expertise in equity to tame other important aspect of mutual fund investment, namely, 'risk', we have done our own assessment and assignment of risk to MF schemes. Instead of depending on the movement of daily NAVs of MF schemes, we are using the underlyings of the funds to arrive at their risks. Going one step ahead and breaking from the league, instead of analysing risk based on the fund's category, we have assessed the standing of an individual fund's risk among total equity-dedicated funds. The importance of such assessment for an investor is that now he can choose investment based on his risk appetite. The problem with the existing system of grading fund's risk based on its category is that you cannot compare risk of a fund in absolute terms. For example, a sectoral fund is always termed as risky because of its concentrated portfolio. However, in our analysis, we found that many of the FMCG funds are more stable and carry lower risk than many of the large-cap funds. Therefore, if you are a risk-averse investor, you can always select funds that have consistently shown low risk, even if it is from the small-cap category.

A fund that is assigned lower risk by us does not mean that it will give lower returns going ahead. If it is a pure equity fund and continues to maintain a lower risk portfolio, it is likely to give better returns in the long term. This is because a fund that falls less has to recover less to generate positive returns. For instance, if fund that has fallen by 50% from, say, Rs100 to Rs50, has to recover 100% before generating positive return. Nonetheless, in the case of a fund whose value has fallen by 25% from Rs100 to Rs75, it will have to recover only by 33% before giving positive returns.

We have bucketed risk in five categories in the following manner.

First, we used the underlying portfolio of the funds to arrive at their composite risk factor. Once that was calculated, we bucketed them in the following manner:

Top 10% volatility score will be 'Low'
Next 22.5% volatility score will be 'Moderately Low'
Next 35% volatility score will be 'Moderate'
Next 22.5% volatility score will be 'Moderately high'
Next 10% volatility score will be 'High'



Risk and return go hand-in-hand. Therefore, by introducing the risk factor in our ranking, we have finally joined the missing piece necessary for any investor to take decision on mutual fund investment. 

The following table lists top-ranked equity funds based on DSIJ's proprietary research methodology. We have evaluated each funds underlying portfolio of stocks and ranked them based on their expected portfolio returns. This way we are also able to rank newly launched funds that are not rated by others due to their short duration of existence. 

We evaluate all the equity funds based on the changed ratings of their underlying stocks and the change in their prices. Therefore, this list is quite dynamic and reflects the best possible return potential of the funds for the next one year. 

You can use this ranking to create your own mutual fund portfolio. Depending on your risk profile, return expectations and overall asset allocation, you can add the best performing fund category to your portfolio. For clarity and to include more funds, we have not included ‘Direct’ and ‘close-ended’ funds. You can visit our website (www.dsij.in/mutual-fund) to know the latest ranking of both ‘Direct’ and ‘Regular’ Funds along with equity oriented hybrid and close-ended funds. 

This ranking can also be used for reviewing different holdings in your fund portfolio. Hence, a consistently laggard performer of a category can be looked at as 'Switch' or 'Exit' advice.

Key To Databank 
Category Rank: Category wise ranking as on 12th Mar 2019
Scheme Name: This is the name of the mutual fund scheme 
NAV (Rs. ): Net asset value per unit of a mutual fund or an exchange-traded fund (ETF) on a specific date 
AUM (Rs. Crore): This is the total market value of financial assets held by the mutual fund scheme on a specific date. 
Weightage: Large-Cap: This is a percentage of total assets held by a fund in the large-cap stocks as defined by AMFI for the current period. 
Mid-Cap: This is a percentage of total assets held by a fund in mid-cap stocks as defined by AMFI for the current period. 
Small-Cap: This is a percentage of total assets held by a fund in small-cap stocks as defined by  AMFI for the current period. 
Total No of Companies: This is a total number of companies held by a mutual fund scheme at the end of a specific month. 
Expenses Ratio: This is the latest expense ratio disclosed by the mutual fund scheme 
Return_1Years: This is the past one-year return given by the scheme. 
Expected 1-yr return: This is based on our analysis of the portfolio of mutual fund scheme and their expected growth in the next one year, assuming the underlying remains the same. Current Rank: Rank as on 12th March  2019
Previous Rank: 22nd Feb 2019 is shown under bracket ()
Risk : Risk as on March 12, 2019

Click Here to Download the databank