The latest edition of bl.portfolio Star Track Mutual Fund Ratings, which is updated every six months, is now available.
The ratings offer you a simple but effective tool to help you cut through the bewildering clutter of mutual fund schemes.
Given there are currently 1,700 mutual fund schemes from 39 categories that invest across asset classes like stock, debt, gold, and international funds, it might be challenging for investors to identify the best mutual fund schemes that are suitable for achieving their financial goals.
The ratings zoom in on those schemes to identify funds that have consistently delivered the best returns to investors, over longer periods of time.
The methodology
The ratings are based on an in-depth analysis of the funds’ historical performance measured both in terms of return and risk.
The returns and risk of the schemes are measured using rolling returns and Sortino ratios, respectively. Rolling returns help identify schemes that have delivered relatively consistent returns during various market cycles and over the long run. Sortino ratio measures the performance of the schemes during downtrends, thus capturing the downside risk.
We have considered one-year, three-year and five-year rolling returns for a total of 7-year NAV history for equity and hybrid funds. For debt-oriented funds, we have considered one-year, two-year and three-year rolling returns for a total of 5-year NAV history. One-year trailing return is also considered to assess the fund’s recent performance.
To arrive at the final score, we assign a 60 per cent weightage for past performance based on rolling returns. Sortino ratio and one-year performance is given a 30 per cent and 10 per cent weightage respectively. The final score is used to rate funds within each category.
The funds with the highest scores are assigned five-star rating while the funds with the lowest scores are assigned one-star rating.
How to use?
The bl.portfolio Star Track Mutual Fund Ratings can be a starting point to start your mutual funds investment journey. All you have to do is select funds from this list that are rated four or five stars, depending on your financial objectives. For your needs, maybe 8–10 MF schemes would be adequate.
Keep in mind that only four-star and five-star funds won’t necessarily make up an ideal portfolio. You should have an asset allocation in place that suits your risk appetite, financial goal and time horizon.
First step is to determine proportion of equities, debt, gold, and international funds in your portfolio.
Diversification across asset classes is crucial in a portfolio to achieve financial goals. Your equity component should be bigger, at roughly 70–80 per cent, if you are a young investor with little liabilities. Your debt allocation should rise as you age, while your equity share should progressively decline. International funds and gold should account for 5–10 per cent of each.
The next step is choosing the schemes.
Within the equity categories, you can choose schemes that suit your risk profile from large-cap, mid-cap, small-cap, multi-cap, ELSS, value and focussed funds. You may need around three to four schemes from these categories. If your risk tolerance is high, you can increase the share of small and mid-cap funds in your portfolio. For investors with moderate risk profile, large-cap funds and hybrid schemes such as aggressive hybrid funds and balanced advanced funds are preferred choices.
First time investors wanting to taste equity risk can consider the passive schemes that are tracking the frontline indices such as Nifty 50 and Nifty 100.
On the debt funds side, investing in liquid and ultra-short-term funds can help you meet your short-term needs, such as keeping emergency cash. If you have a time horizon of two to three years, short duration funds, corporate bond funds, and banking and PSU debt funds are all good choices. Gilt and long duration funds are suited only for savvy investors who understand the interest rate risk well. Debt funds can also be part of the long-term portfolio. Long-term investments in debt funds not only reduce volatility but also ensure higher consistent returns.
Periodical review, a must
The bl.portfolio Star Track Mutual Fund Ratings is merely a report card. It tells us how the funds have done in the past. Mutual fund investments are subject to market risks and there is no guarantee that the past performance will reflect in the future.
Periodical review of portfolio, say once a year, should be conducted as some of the schemes may not live up to our expectation. Either their strategies may not work in certain markets or a fund manager may move out, resulting in portfolio chopping and changing. Such a situation should be thoroughly examined, and the appropriate funds should be added to the portfolio in their place.
Happy investing!