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How We Ranked The Funds
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For equity, diversified funds with average three-year allocation to large cap stocks more than or equal to 80 per cent of portfolio were classified as large-cap funds; 60-80 per cent as large- and mid-cap funds, 40-60 per cent as multi-cap funds, and less than 40 per cent as mid-and small-cap funds. For equity tax-savings, all funds compliant with Section 80C of the Income Tax Act were included.
Funds with average equity allocation of 60 per cent and above in the past three years were classified as hybrid: equity-oriented funds; those with an allocation up to 25 per cent came under hybrid: monthly income. For debt, income funds were classified as per their stated objectives, and liquid funds based on the dividend distribution tax they charge. Other debt funds were classified as ultra short-term funds, with maturity of less than a year, and those with average maturity of 1-4.5 years were classified as short-term funds. The top 10 (in few cases eight) were picked as per the scores.
The methodology used to rank them was based on risk-adjusted returns, but widened to take a composite measure of the returns a fund generates and the risk it takes.
Risk: To calculate risk, monthly/weekly returns were compared with monthly risk-free returns for equity and hybrid funds, and weekly risk-free returns for debt funds. For all practical purposes, State Bank of India's 46-90 days term-deposit rate, which is 5.5 per cent now, was taken as a proxy for risk-fee returns. For months/weeks the fund had underperformed the risk-free return, the magnitude was added. This was divided by the category average to get a risk score, which was ranked with similar funds and a relative risk score assigned.
Returns: The monthly/weekly returns of each fund (adjusted for dividend, bonus or rights) were compared with the risk-free return to get the fund's total returns in excess of the risk-free return. The monthly average risk-adjusted return was divided by the average category return for return score. In case of a negative category average, the risk-free return was used as the benchmark. The returns were ranked with similar funds and a relative return score assigned. All return estimations assumed reinvestment of dividend and were adjusted for bonus or rights. Trailing returns for over one year were annualised.
Finally, a composite risk-return score was obtained by subtracting the risk score from the returns score. This score was used to select the top 100 funds and to rank them. To facilitate comparison, the composite score of each category was normalised to a scale of 1 to 10. All data is as of 31 December 2010.
Best equity fund manager: The equity fund manager who gave the maximum risk-adjusted performance over the past three years, among the diversified equity funds across all market capitalisation groups.
Best debt fund manager: The fixed-income fund manager who gave the maximum risk- adjusted performance over the past three years, among the medium-term income funds.
Long-term leader: Ranking is based on the highest five-year SIP return.
Smartest fund manager: Funds were ranked on the basis of their three-year alpha. Best asset management company: Based on funds rated either 4-star or 5-star by Value Research as a percentage of the total number of rated funds. AMCs with less than Rs 3,000 crore of average assets under management as of December 2010 were not included.
Sharpe ratio: A measure of the fund's risk-adjusted return per unit of risk.
Asset size: Total assets being managed by the fund as of 31 December 2010.
SIP: Systematic investment plan is a method of investing a fixed sum, on a regular basis, in a mutual fund scheme.
NAV:Net asset value is the current price of each unit of a fund scheme.
(This story was published in Businessworld Issue Dated 28-03-2011)