Look for 1-year, 3-year and 5-year performance, as Jason Monteiro explains

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1 Best Mutual Fund: How to choose winning equity funds May 02, :14 PM Jason Monteiro Look for 1-year, 3-year and 5-year performance, as Jason Monteiro explains We are often asked: What is the best way to choose mutual fund schemes? As you know, it is certainly not a good idea to consider only recent performance. One of the best ways to judge the performance of mutual funds is to look at performance over different time periods and check how many times the schemes have been among the top performers. We have done this exercise for different schemes, comparing their performance to their benchmarks over one-year, threeyear and five-year periods ending 31 March Here, we look at three different categories of schemes, namely, equity diversified, balanced and sector funds. Equity diversified funds invest almost all their assets in equity, depending on the scheme s objective, and are not restricted to any sector. Balanced funds invest up to a little more than half in equity and the rest in debt, whereas sector funds invest a majority of their assets in companies related to a particular sector. Let s take a look at schemes that were in existence for five years or more. Out of the 134 schemes, just 65 were able to beat their benchmark in the last one-year, two-year and three-year periods. And as many as 17 schemes were not able to beat their benchmark on any occasion. That gives you a clue to what not to touch even with a bargepole! The list of 65 schemes included quite a few small- and mid-cap funds. Therefore, we have segregated the list into smallcap and mid-cap funds, large-cap oriented funds and other equity diversified funds.

2 Small- and Mid-Cap Schemes Among the small- and mid-cap schemes, IDFC Premier Equity Fund, led the list with a return of 21.44% over the five-year period, compared to its benchmark s return of 7.48%. Its top five holdings (as on 29 February 2012) were Page Industries, Asian Paints, GlaxoSmithKline Consumer Healthcare, Coromandel International and Bata India. This is an interesting Fund. It opens for subscriptions only during certain periods when its fund managers think that the market is reasonably valued. It is open now, for instance. Next on the list was ICICI Prudential Discovery Fund, which has done exceedingly well in the last three-year period, providing a return of nearly 41%. Despite being a mid-cap fund, surprisingly, it has Reliance Industries (RIL) as its top three picks, the others being Sterlite Industries and Cipla which are also large-sized companies. If it was not tempted to break the selection rule and have Reliance in the portfolio, its performance would have been even better. The other three funds, which made it to the top five, were: UTI Master Value Fund, Reliance Equity Opportunities Fund and Birla Sun Life MidCap Fund. Large Cap Schemes UTI Opportunities Fund topped the list here, with a return of 18.05% compared to its benchmark s return of 7.95%. The portfolio of this large- and mid-cap fund comprises mainly large-cap stocks. Some of the stocks in its portfolio are Infosys, CRISIL, State Bank of India (SBI) and Tata Consultancy Services

3 (TCS). Quantum Long Term Equity Fund made it to the list with a return of 15.34% compared to its benchmark s return of 7%. Being a long-term fund its portfolio consists of many large-cap stocks. Not only has this Fund performed well, it is also one of the lowest cost equity funds and must be considered for long-term wealth creation. HDFC Top 200 Fund has been a consistent performer and is one of the largest equity funds in terms of assets under management. It returned 15.13% in the last five-year period. The focus of the scheme has been 200 of the largest capitalised companies and the fund manager has stuck to it. SBI accounts for nearly 8% of its assets and is followed by companies such as ICICI Bank, Infosys and ITC. Following closely were Canara Robeco Equity Diversified and Reliance Regular Savings Fund Equity with returns of 15.08% and 14.97%, respectively. Other Equity Diversified Schemes The top four schemes on this list are all dividend yield funds, that is, funds which invest mainly in equity which offer a high dividend yield. These include Birla Sun Life Dividend Yield Plus, Tata Dividend Yield Fund, UTI Dividend Yield Fund

4 and ING Dividend Yield Fund. All four of these schemes returned 16%-17% in the last five-year period. The common names in their portfolio are Infosys, Bank of Baroda, Castrol India, Hindustan Unilever and TCS. Investing 70% of its assets in stocks with a trailing P/E ratio less than that of the Sensex at the time of investment is a unique investment objective of Tata Equity P/E Fund. The Fund managed to generate a return of 15% in the last five-year period. The Fund has done well in the last threeyear period too. Its top picks include Cairn India, Polaris Financial Technology and Grasim Industries. ICICI Prudential Discovery Fund is yet another mid-cap fund which has made it to the list. Balanced Funds Out of the 20 balanced schemes, 10 have been able to beat their benchmarks in the last one-year, three-year and five-year periods. Two schemes from HDFC,namely, HDFC Balanced Fund and HDFC Prudence Fund, have taken the lead in ranking based on the five-year performance of these 10 funds. Both these schemes provided a return of nearly 15% compared to the benchmark s return of 8.37%. HDFC Balanced Fund has done well in the last one-year period as well, providing a return of

5 6.59% compared to its benchmark s return of -3.16%. Reliance Regular Savings Fund Balanced made it to the list with a return of 14.45%. However, in the last one-year period, it has struggled returning -0.1%. The next two funds Birla Sun Life 95 Fund and DSP BlackRock Balanced Fund returned around 12% in the five-year period. Sector Funds We advise you never to buy sector funds. Out of the 22 sector funds, just nine were able to outperform their benchmark in the last one-year, three-year and five-year periods. We did not include schemes where the benchmark was not available. Ranking these nine funds on their fiveyear performance showed that MNC funds did well; two such schemes topped the list. UTI MNC Fund returned 15.59% and Birla Sun Life MNC Fund returned 14.80% compared to their benchmark s returns of 10.34%. These Funds have done well in the last three-year period as well, providing returns of 34.83% and 38.12%, respectively. Some of the names common in their portfolio are Bosch, Cummins India, CRISIL, Nestlé India and Hindustan Unilever. Canara Robeco Infrastructure Fund made it to the list with returns of 11.21%. Some of the names in its top holdings are: RIL, Bharti Airtel, Cairn India, Coal India, Hindustan Zinc and Power Grid Corporation. Many of these are not infrastructure companies, unless metals and energy are defined as infrastructure. Tata Life Sciences & Technology Fund, a scheme which invests in technology and life sciences sectors returned 8.13%. Its top holding included GlaxoSmithKline Pharmaceuticals, Cadila Healthcare and Nestlé India. Birla Sun Life Buy India Fund, a scheme focused on consumer and healthcare sectors, made it to the list with returns of 8.43%. Some of its top holdings are: GlaxoSmithKline Pharmaceuticals, Shoppers Stop, Pfizer, Wyeth and Jet Airways India. With the benefit of hindsight one can say, it missed the big gains of consumer stocks like Page Industries (Jockey) and Jubilant FoodWorks (Domino s Pizza). These are highly expensive stocks which continue to be sought after because of their high growth potential.