Keep a smart, flexible and minimalist MF portfolio


The job of any ranking system is to make the life of the investor easier and to that end we have significantly reduced the number of programs in our list from 50 to 20. The list is the result of a two step process. In the first step, mintCrisil’s data partner applies a series of filters based on returns, risks and portfolio characteristics such as concentration, asset quality and liquidity. In the second step, we spoke with fund managers to understand the fund’s strategy and eliminate funds with flaws that a pure numbers approach may not detect. This year, we made some strategic decisions to simplify the list and make it more useful to ordinary investors. The four strategic decisions:

1) Swiss Army Knife Fund

The general philosophy behind this year’s review is that of a “Swiss Army Knife”. The idea of ​​simplifying and decluttering the work of an investor. This means minimizing the number of fund categories and directing readers to the categories that offer the most flexibility for investing in a range of stocks and bonds. This is why we have replaced all the existing categories in the hybrid fund space with a single “go anywhere” sub-category which is made up of balanced advantage funds. It shouldn’t be an investor’s job to determine whether a 10-25% equity allocation is better or 65-80%. This asset allocation decision is best placed in the hands of a fund manager without complex rules laying their hands on it. Switching within a fund rather than between funds also saves a lot of taxes, which can make a big difference in terms of returns, as we show here. (bit.ly/3nF0kGm).

2) Large-cap liabilities

A second trend we have noted is that a large number of actively managed mutual funds are falling behind their passive counterparts, as evidenced by reports from S&P Dow Jones Indices and others. Based on this body of research, we have only selected passively managed index funds in the large cap category.

3) There is no more liquid

A series of regulatory measures taken to reduce the risk of liquid funds have largely drawn the “juice” of this category or its ability to do better than a simple bank savings account. Liquid funds have an exit charge if redeemed within 7 days and a 20% cash holding standard (compared to 10% for other debt funds). The stamp duty on mutual fund transactions also makes very short holding periods unsustainable. We believe that the horizons of up to 90 days are best filled with bank savings accounts. For horizons of 90 days to 1 year, money market funds do a better job than liquid funds.

4) Ready-to-use funds

Some funds are unique in terms of structure and cannot easily be compared to and judged against a peer group. These funds often come out of mutual fund rankings that are too tied to a mechanical comparison system. Two such products that are out of the box and yet powerful enough to be in full-fledged boxes are the Bharat Bond series of mutual funds and the Motilal Oswal S&P 500 index fund. Bharat Bond pioneered the concept. investment at target maturity via a passive, low-risk route. Motilal Oswal S&P 500 pioneered exposure to the world’s largest market through a passive index-oriented path. Both funds have seen competitors launched in recent years and as their respective categories mature we will consider placing them through traditional filters which select patterns in standard categories like flexicap or large caps. .

What about the old list?

The current list is much smaller. This does not mean that you have to redeem your investments. The refund tends to attract tax and exit charge. Monitor your existing funds and only redeem them if they are underperforming on a sustainable basis.

Methodology:

We have used sliding returns to assess return performance given its superiority over sliding returns in its ability to capture the actual return experience, which is not marred by the level of net asset value (NAV) at the start or end date. For example, we used the three-year rolling active returns against the category’s benchmark, renewed daily for the past five years, for equity funds. For index funds, the main criterion was the tracking error of the last 3 years against their reported benchmarks. For balanced advantage funds and debt funds, a rolling 1-year return, renewed daily, for the past 3 years has been taken into account.

Along with performance, risk was also weighted across all categories of mutual funds to varying degrees depending on the category considered. For example, returns were weighted 50% for equity funds, risk was weighted 25%, and portfolio characteristics (such as equity and industry concentration and liquidity) were weighted 25%. %. For debt funds, returns were weighted 50% and portfolio characteristics were weighted 40%. The characteristics considered were also different such as the concentration of issuers, the quality of the assets, the modified sensitivity and the exposure to sensitive sectors. The risk has been assigned a weighting of 10%. Risk was measured using the standard deviation of the sliding return. The analysis period was divided into four overlapping periods and each period was given a progressive weight from the longer period as follows: 32.5%, 27.5%, 22.5% and 17, 5%, respectively. In Balanced Advantage Funds (BAFs), we have given 50% weighting to returns, 25% to risk and 25% to downside risk. Downside risk is measured as the standard deviation of system returns that are lower than benchmark returns. In arbitration, systems with at least one year of history were considered eligible for ranking. Thereafter, the plans were selected on the basis of the average return (60% of the weight), volatility (25% of the weight) and the number of negative returns (15% of the weight). The average return is the average of the daily returns based on the net asset value of the plan for the period analyzed and the volatility is the standard deviation of these returns.

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