How Business Today ranked India's best mutual funds and fund managers

Business Today Fund Awards have been conceived to solve a specificproblem that investors have. The problem is simple-there are too many funds ofvaried kind and investors don't know how to begin understanding this universe.They don't have a framework within which to map their investing needs to thebewildering variety of funds that exist. There's no clear way to know whichfunds should fit into this framework and which should be ignored.

For two decades now, Value Research has been working tobring order to this chaos. Over these years, we have evolved two different waysof classifying mutual funds. One is based on what investments funds invest in,and the other on what need they fulfill for the investor. An example of acategory by the former system is 'Equity: Large & Mid-cap' while one fromlatter is 'Growth'. The former system is intended for experienced orprofessional investors and the latter for someone who just wants a solution tohis needs without getting too deeply into the nitty-gritty.

To simply it further, we have kept all niche fund categoriesout of our framework. These include the sector and thematic funds whichordinary investors should anyway keep away from.

i. Aggressive Growth - Universe of multi-cap, mid and smallcap funds.

Diversified equity funds with an average allocation of 40 to60 per cent of their assets to large cap stocks, based on the half yearly fullportfolios of the past three years have been classified as multi cap funds.While those with an average allocation of less than 40 per

cent to large cap stocks were classified as mid and smallcap funds.

ii. Growth - Universe of large and large & mid-capfunds.

Diversified equity funds with an average allocation of 60 to80 per cent of their assets to large cap stocks, based on the half yearly fullportfolios of the past three years have been classified as large & mid capfunds. While those with an average allocation of more than 80 per cent to large cap stocks were classified as large cap funds.

iii. Conservative Growth - Universe of balanced funds.

This included the set of equity oriented hybrid funds. Thefunds with an average equity exposure of more than 60% based on the last threeyears' full portfolios were classified as balanced funds.

iv. Income - Universe of medium and long-term bond funds.

All the income and gilt funds as per their stated objectiveswere considered in this category. These funds have the leeway to move full intocash or go to any extremes of the maturity band, based on the interest rateoutlook of the fund manager.

v. Cash - Universe of liquid and ultra short funds.

This peer set includes all the liquid funds (funds with upto91 days of average maturity) and ultra short-term funds which keep a very lowmaturity but do not qualify the legal definition of liquid funds and hence havea lower dividend distribution tax applicable for non-liquid funds.

We applied our proprietary risk-adjusted rating model forthe above investor centric fund classification to choose the best funds foryour financial goals. The Rating is a composite measure of both returns andrisk. This single measure combines the Value Research Fund Risk Grade and theValue Research Fund Return Grade to give an indication of a funds risk-adjustedreturn. This rating is purely quantitative and there is no subjective componentto it. It is a unified performance measure and summarises how a fund hasperformed historically, relative to the other funds in its category, for therisks it has taken.

The fund ratings are based on trailing 3-year performance ofeach fund vis--vis other funds in each category. Any fund which is not 3-yearold has not qualified for rating.  Also afund with less than Rs 100 crores of average assets under management in thepast six months has not been considered.

The Value Research Fund Rating is determined by subtractingthe fund's Risk Score from its Return Score. The resulting number is then ratedaccording to the following distribution.

*****      Top 10%

****        Next 22.5%

***        Middle35%

**           Next 22.5%

*           Bottom 10%

The Value Research Fund Risk Grade captures the fund's riskof loss. It is different from the conventional risk and volatility measureslike standard deviation and beta as it indicates only downside volatility. Thelatter refers to absolute losses and even periods when the fund underperforms arisk-free guaranteed investment. The rationale: you can always get a guaranteedreturn by investing in a risk-free guaranteed investment like a bankterm-deposit. The risk of investing in a mutual fund not only includes thepossibility of losing money, but also the chance of earning less than you wouldhave on a guaranteed investment.

To calculate Fund Risk, monthly/weekly fund returns arecompared against the monthly risk-free return for equity and hybrid funds andweekly risk-free return for debt funds. Risk-free return is defined as StateBank's 45-180 days Term Deposit Rate. For all months/weeks the fund hasunderperformed the risk-free return, the magnitude of underperformance isadded. This helps us to arrive at the average underperformance and how the fundhas performed vis--vis its category average. The relative performance of thefund is expressed as a risk score.

The Value Research Fund Return Grade captures a fund'srisk-adjusted return in comparison to other funds in the category. The returnsthough adjusted for dividend, bonus or rights, are not adjusted for loads. Thefund's monthly/weekly return is compared with the monthly/weekly risk-freereturn to arrive at the fund's total return in excess of the risk-free return.The monthly average risk-adjusted return is compared with the average categoryreturn to arrive at the overall score. The overall scores are then multipliedby 100 to make them more readable.

Best Fund House

Best Equity Fund Manager

Best Debt Fund Manager

1. For the above exercise, the universe of mainstream fundswere only considered. This meant exclusion of niche and peripheral categoriesand fund categories which are fairly commoditized by their very design.

The Universe

Equity: Large & Mid Cap

Equity: Large Cap

Equity: Mid & Small Cap

Equity: Multi Cap

Equity: Tax Planning

Equity: Infrastructure

Hybrid: Equity-oriented

Hybrid: Debt-oriented Conservative

Hybrid: Debt-oriented Aggressive

Hybrid: Arbitrage

Hybrid: Asset Allocation

Debt: Income

Debt: Short Term

Excluded Categories:

Debt: FMP

Debt: Gilt Medium & Long Term

Debt: Gilt Short Term

Debt: Liquid

Debt: Ultra Short Term

Equity: Banking

Equity: FMCG

Equity: International

Equity: Others

Equity: Pharma

Equity: Technology

Gold: Funds

Hybrid: Others

2. The exercise was based on the quarterly performance overthe past 5-years (20 quarters). Each quarterly performance of a fund wasassigned a quartile rank in their respective categories.

Best Fund House

The fund house with relatively highest top quartileperformance was adjudged the best.

Fund companies with less than Rs 500 crore asset undermanagement and companies which started in the past five-year were notconsidered.

Best Equity and Debt Fund Manager

The fund manager with relatively highest top quartileperformance was adjudged the best fund manager. This was irrespective of hisjob change, i.e. if a fund manager moved from one fund to another, he wasattributed the fund performance for his term across fund houses. Managers withless than Rs 100 crore under management were excluded.

Fund managers with minimum of 5-year track record were onlyconsidered.