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How to Pick Performing Schemes
Funds that continue to stay in the top grade of performance over longer periods are the ones to bet on, advise investment experts
The mutual fund performance charts of the past few months make for an impressive reading. Funds across all categories boast of stellar returns. Sample this: The mid and small cap category has averaged 77 percent return over the past 12 months, with the best fund delivering a staggering 120 percent. The tax-saving funds also average an impressive 51 percent, including a fund which has soared 92 percent. Many of the table-toppers are funds of proven quality and track record. However, there are also schemes that are not that well-known. Some of these have rarely made it to the performance charts in the past, yet, of late, they boast of big-ticket returns that could easily lure investors. You would be wise not to touch them blindly.
As any advisor would suggest, it is better to invest in funds with a track record of delivering high returns, than opt for schemes temporarily reining the performance charts. Sure, past performance is no guarantee of returns in the future, but if this performance has been delivered consistently, you can be reasonably assured that your money is in safe hands. So, how best can the investor narrow down his options?
PERFORMANCE RANKING
One may choose to look at the fund's performance across, say, 1-year, 3-year and 5-year periods. If the fund has fared well across all the time frames, it would typically make for a sound bet. However, as the return across all periods will be based on the fund's net asset value (NAV) on a given date, this method may present an inaccurate picture. For instance, a scheme's portfolio construction may have improved substantially in the past one or two years. This will not only boost its short-term returns, but will also be reflected in its 3-year and 5-year performance. So, even if the fund has not performed well earlier, its performance in the last stretch will enhance its return profile over longer time frames.
A better way to gauge performance would be to look at yearly returns and opt for funds that consistently feature in the top quartile of performance every year. Top-quartile (or the fourth quarter) refers to the top 25 percent of the schemes in the universe, in terms of returns. Third quartile refers to funds that fall in the top 50 percent of the uni verse but below the top 25 percent. A quality fund is one that appears in the top quartile or the third quartile year after year.
However, not all funds that come in the top quartile in a given year or period can do so in the next year or period. For instance, only five of the 10 funds that ranked in the top quartile five years ago, appear in the top quartile again this year. Among those that have slipped, there are some that feature in the bottom half of the performance charts. This clearly shows the importance of tracking a fund's performance on a continuous basis.
So which funds figure high on consistency? We have crunched the numbers for your benefit, based on the data available with mutual fund tracker Value Research. For each category of funds, we have calculated the annual quartile rank of all funds for each of the past five years, starting from 2009. For obvious reasons, we limited our search to funds that have a minimum five year track record.
IMPROVED PERFORMANCE FUNDS
There are very few funds that have seen a big improvement, of late, in relative performance compared to earlier years. Principal Growth, Reliance Focused Large C ap, P r i ncip a l T a x S av i n g s, ICICI Prudential Top 100 and UTI Leadership Equity Fund have managed to improve their return profile and have ranked consistently in the top two quartiles over the past three years, having spent earlier years in relative obscurity. Other funds that ranked consistently in the bottom two quartiles in the earlier years have mostly remained stuck in that segment for all five years.
Scheme s such a s DWS Investment Opportunity, Sundaram Growth and Taurus Bonanza have been languishing in the b ot tom-r u n g of t he performance charts for each of the years under consideration.
Besides, there a re several others that have rarely made an entry into the leading performance charts. Escorts Leading Sectors, Taurus Discovery, Sundaram Equity Multiplier, ING Midcap, HSBC Progressive Themes, SBI Contra, DWS Tax Saving, IDFC Imperial Equity, JM Equity, LIC Nomura Tax Plan, LIC Nomura MF Equity, HSBC Dynamic, Sundaram Select Focus and UTI Equity Tax Savings are some prominent examples.
ONE-YEAR WONDERS
Some schemes that have u nder per for med for most part of the cho sen five-year period, have suddenly shown up among the top quartile performers this year. Reliance Vision and Birla Sun Life Special Situations are two such funds. In their respective categories, they rank seven out of 56 and six out of 132 on the performance charts this year. Escorts Tax Plan in the equity-linked savings scheme (ELSS) category is another such fund ranking 16 out of 73 funds in the category. However, a closer look at past performance reveals its abysmal track record. Don't get easily swayed by the performance of these funds. It would be wise to check their historical performance and take a more informed decision. Although some of these funds may genuinely be turning a corner, it would be too early to call it a turnaround. You may opt for the funds if they continue to stay among the leaders over the next couple of years.
FUNDS THAT HAVE SLIPPED
At the other end of the spectrum, there are funds that figured in the top quartiles till a few years ago, but have seen a downturn of late. In the large and mid-cap funds category, ING Dividend Yield Fund and UTI Dividend Yield Fund have both struggled in the past three years (2011-13), despite being in the top quartile of performance for the first three years (2009-11) of the chosen period. This because value stocks, which these type of funds typically target, have witnessed a climbdown in prices over the past three years. There are several funds in the ELSS space that have witnessed deterioration in their relative performance. Canara Robeco Equity Tax Saver, ING Tax Savings, L&T Tax Advantage and Taurus Tax Shield have seen their rank slip over the past three years. Both Canara Robeco Equity Tax Saver and ING Tax Savings ranked consistently in the top quartile of performance during 2009-11, but have failed to continue with their performance.
HDFC TaxSaver, which was among the top rankers during the 2009-11 period, also slipped for a while but has managed to climb up and has delivered top quartile performance, so far, this year.
In the large-cap fund basket too, some funds have slipped. Franklin India Bluechip, which enjoyed a 5-star rating from Value Research a while back, has slipped to a 4-star rating, and for good measure. After ranking in the top quartile during 2009-2011, the fund has seen a downturn in performance vis-a-vis its peers. It has failed to rank in the top two quartiles of performance for the past three years, including this year. L&T Equity and UTI Opportunities had both seen a similar downturn in performance, but have managed to pick themselves up by delivering top quartile performance this year.
The most consistent outperformers It is very rare to find a fund that manages to rank consistently in the top quartile year after year. The data affirms this. No scheme has emerged as the top quartile performer for each of the past five years. However, there are some funds which have come very close to achieving this feat--having missed out on just one occasion.
Axis Long Term Equity in the tax saving funds category, Mirae Asset India Opportunities in the large and mid-cap funds segment, ICICI Prudential Target Returns and UTI Equity in the large-cap funds basket have emerged as the most consisten top-performing funds in the entire universe of diversified equity funds over the past five years.
Besides, there are several others that have managed to put up a good show over this period.
The maximum consistent per formers belong to the large and mid-cap category of equity funds .Birla Sun Life Frontline Equity, Franklin India Flexi Cap, Kotak Select Focus and Quantum Long Term Equity are all consistent top performers, having ranked in the top two quartiles of performance for each of the past five years. Quantum Tax Saving is another fund in the ELSS basket which ranks high on the consistency scale.
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