A financial advisor was recently confronted by an angry investor who had taken his advice and put money

in a 5-star large-cap equity fund at the start of 2011. The fund shed 16 per cent value (called net asset value or NAV) in 2011. The investor found it difficult to stomach that a scheme that returned 20 per cent or more a year for the past 10 years and was accordingly rated 5-star had failed him. It took time for the advisor to calm him down and explain that a 5-star rating does not mean the fund will not be in the red when there is bloodbath in equity markets. He advised him to remain invested for a longer period. The year 2011 was bad for equity investors as the country's two large-cap equity indices - the Bombay Stock Exchange (BSE) Sensex and the National Stock Exchange (NSE) Nifty - fell 24 per cent. Mid-cap and small-cap stocks fared worse with BSE Mid-cap and BSE Small-cap indices falling 33 per cent and 42 per cent, respectively. The advisor told the investor that negative return during a period does not merit dumping of the scheme and that the fund in question is a 'decent' performer (a 16 per cent fall compared to 24 per cent decline in the Sensex and the Nifty). Critics may say this is just statistics, hardly a consolation for a person who has lost money. But if he had invested in any equity fund rated 1- or 2-star in the large-cap category, his loss would have been 25-30 per cent or even more.

Swati Kulkarni, executive vice-president and fund manager, UTI AMC, says, "Equity markets can be volatile and there may be periods of nil or negative return. The performance of a mutual fund scheme needs to be measured against the benchmark." A good mutual fund scheme not only outperforms its benchmark when markets are rising but also minimises losses when the chips are down. STRESS TEST: STAR POWER In this year's Money Today-Value Research Mutual Fund Rankings, we put 4- and 5-star funds

through a stress test by measuring their performance in 2011. Our knowledge partner, Value Research, has rated the schemes on the basis of their three-year (ended 30 April 2012) performance. We compared the 2011 returns of 4- & 5-star funds in each category to a benchmark that best suited the group of funds-BSE Sensex for largecap funds, BSE 500 for large-cap, mid-cap, multicap & tax-saving funds, BSE Mid-cap for midcap & small-cap funds, CNX Infrastructure for infrastructure funds and Crisil Balanced Fund Index for equity-oriented balanced funds. In pure equity categories, all 4- and 5-star funds beat benchmarks by a fair margin. In the hybrid equity-oriented category, barring HDFC Prudence, all 4- and 5-star funds beat the benchmark Crisil Balanced Fund Index. Beating the index does not mean investors have made gains. When markets fall, it could mean your losses are less than they would have been if you had invested in the benchmark index. LARGE-CAP RESILIENCE In the large-cap equity fund category, ICICI Prudential Focused Bluechip Fund (a 5-star fund) outperformed the Sensex by 9 percentage points. The fund's NAV fell 15 per cent as against 24 per cent drop in the Sensex. Rs 1,000 invested in the fund at the start of 2011 would have been Rs 850 at the end of the year. If this money was invested in Sensex stocks in same weights as individual index stocks, the value of the investment would have been Rs 760 at the end of the year. The worst performing fund in the category would have shrunk the investment to Rs 700. Franklin India Bluechip Fund and SBI Magnum Equity (both 5-star funds) beat the Sensex by 6.6 percentage points and 5 percentage points, respectively. MID-CAP SURPRISE Some schemes in the mid- & small-cap category sprang a few surprises both in the way they minimised losses and the margin by which they beat their benchmark BSE Mid-cap index. The value of SBI Magnum Emerging Businesses, for example, fell 9 per cent compared to 33 per cent fall in the BSE Mid-cap index. Another SBI Mutual Fund scheme, Magnum Global, limited its loss to 13 per cent. These are better performances than that of large-cap funds, which are known to fall less than mid-cap funds in a bear market.

Click here to Enlarge TAX-SAVING ONLY Though all 5-star tax-saving funds beat the benchmark (BSE 500 index), their performance was not as 'emphatic' as many retail investors would have liked. Canara Robeco Equity Tax Saver's NAV fell 16 per cent as against 27 per cent drop in BSE 500. ICICI Prudential Tax Plan (-24 per cent) and HDFC Tax Saver (-22 per cent) barely managed to beat the benchmark. The winner in the pack is Franklin Tax Shield with only a 15 per cent drop in NAV. INFRASTRUCTURE ON WEAK FOUNDATION Though most 4- & 5-star funds in this category beat the benchmark index-CNX Infrastructure-as a category it was the worst performer with all top-rated funds shedding 20 per cent or more value. Click here to Enlarge The only 5-star fund in this category-Taurus Infrastructure-lost 33 per cent value as against 38 per cent fall in the NSE Infrastructure index. Canara Robeco Infrastructure Fund, with a negative 20 per cent return, was the best fund in the category in 2011. DEBT CUSHION If the power of equity funds was not enough to stem the fall in the value of investments, a small exposure to debt schemes could have limited your losses. The average return by income funds was 8.5 per cent while liquid funds gave 8.3 per cent. The better rated debt funds returned more than 9 per cent. WHEN IN EQUITIES... For equity investors, the 2011 fall, or for that matter 2008-like slumps, are part of the game. Equities are a high-risk-high-gain play and the best way to lower risk is by remaining invested for long and taking staggered bets. Sunil Mishra, chief executive officer, Karvy Private Wealth, says equities always come with market risk. "Last year was challenging for equity markets across the globe, and India was no exception. The result was evident. The finest (and perhaps the most trusted) funds ended the year in negative

territory." But should this be a reason to exit equity funds (or crucify the financial planner who suggested you a fund in good faith)? "We believe that shying away from an asset which has time and again proven its long-term investment potential will not be a prudent investment decision," says Mishra. But years like 2008 and 2011 taught a few lessons to investors. Anjaneya Gautam, vicepresident, mutual fund, Bajaj Capital, says systematic investment plans, which encourage regular savings without worrying about market volatility, and an asset allocation approach are the best way to build wealth in the long term. MONEY TODAY-VALUE RESEARCH ANNUAL MUTUAL FUND RANKINGS Mutual funds, especially equity funds, are long-term investments, but a yearly review of your funds' performance is highly recommended. Our annual mutual fund ranking is an effort to keep you updated about the performance of funds you have invested in. The rankings are based on three-year (ended 30 April 2012) performance of equity and hybrid funds, and 18-month performance of debt funds. For rating, equity funds have been divided into categories-large-cap, large & mid-cap, multi-cap and mid & small-cap. Infrastructure and tax-saving funds are two other important categories covered. Large-cap funds allocate 80 per cent funds to large-cap stocks. Large & mid-cap funds have 6080 per cent allocation to large-caps. Multi-cap funds have 40-60 per cent allocation to large caps and mid & small-cap funds have only up to 40 per cent allocation to large cap stocks. Click here to Enlarge Large-cap funds: Two of the four 5-star schemes in the category are from ICICI Prudential. ICICI Prudential Focused Bluechip tops the category with 23 per cent annual return in three years to 30 April 2012. Launched in 2008, the scheme has been a good performer in the category not just during the last three years but also in 2011, a bad year for equity. It is followed by ICICI Indo Asia Equity Fund, which has given a 21 per cent return per year in the last three years. Last year, it managed to limit its loss to 2.5 per cent. The old war horse, Franklin Templeton Bluechip, continues to impress with consistent returns.

The scheme's NAV rose 21 per cent in the three-year period. Its consistency can be gauged by its 10-year annual return of 25 per cent. SBI Magnum Equity, another old-timer, has given a 21 per cent annual return in the last three years. Click here to Enlarge Large- and mid-cap funds: This category proves that small can be wonderful. Three out of five 5-star funds in this category are from small fund houses (with assets below Rs 10,000 crore). Quantum Long Term Equity, with 28.5 per cent annual return in three years, tops the group. The scheme had only Rs 105 crore under management at the end of March 2012. Quantum Mutual Fund manages Rs 190 crore. Another small fund, Mirae Assets India Opportunities Fund, launched in March 2008 amid equity market mayhem, has given 28 per cent annual return in the past three years despite losing 19 per cent value in 2011. The fund had assets under management of only Rs 214 crore on 31 March 2012. Canara Robeco Equity Diversified Fund, with 25 per cent annual return in three years, is another scheme from a relatively smaller fund house making the cut for a 5-star rating. UTI Opportunities (24.5 per cent) and HDFC Growth (24 per cent) are other 5-star funds in the category. Canara Robeco Equity Diversified managed Rs 542 crore and HDFC Growth Rs 1,260 crore at the end of March 2012. Schemes from small fund houses ruling the group was not as much a surprise as the missing of one name that always appeared prominently among the Top 10 in this category. Click here to Enlarge Yes, even we were taken aback to see HDFC Top 200 missing from the list (it's not even in top 10), so we cross-checked with our data partner Value Research, which said the scheme might have been outperformed by others in the period under consideration. Multi-cap funds: Despite the presence of category behemoth HDFC Equity Fund, ING Dividend Yield (with just Rs 97 crore assets) topped with 29 per cent annual return. In 2011, its NAV fell only 17 per cent compared to 27 per cent drop in HDFC Equity's NAV. This proves the scheme has the

wherewithal to sail through difficult times. HDFC Equity (27 per cent annualised return in three years), HDFC Capital Builder (25.5 per cent) and Tata Ethical Fund (25 per cent) are the other 5-star funds in the group. Click here to Enlarge Mid- and small-cap funds: IDFC Premier Equity is conspicuous by its absence from the category this year. SBI Magnum Emerging Businesses, however, is a worthy replacement. The fund not only clocked 40 per cent annual return in the three-year period, it also managed to give a double-digit (12.84 per cent) return during the one-year period to 30 April 2012, when the BSE Midcap index fell 3 per cent. In 2011, the fund's NAV fell 9 per cent as against 33 per cent fall in the BSE Midcap index. Religare Mid N Small Cap Fund, HDFC Mid-cap Opportunities and DSPBR Micro Cap are the other 5-star funds in the mid- and small-cap fund category. Tax-saving & infrastructure funds: Only three funds made the cut for a 5-star rating. Canara Robeco Equity Tax Saver, ICICI Prudential Tax Plan and HDFC Taxsaver have given 25 per cent a year for the last three years. Canara Robeco, however, showed more resilience (a 1.29 per cent drop last year) in a falling market. There is not much cheer for investors in infrastructure funds. Though a couple of funds-Taurus Infrastructure and HDFC Infrastructure-gave more than 18 per cent annual return in the past three years, they failed to show resilience in 2011. Click here to Enlarge The only 5-star fund in this category (Taurus Infra) shed 33 per cent value during the year. Hybrid Funds: HDFC Mutual Fund schemes dominate both debt and equity-oriented categories. HDFC Balanced and HDFC Prudence topped the equity-oriented category with more than 25 per cent return in the three-year period. In the debt-oriented category, HDFC Multiple Yield Plan 25 and HDFC Multiple Yield clocked close to 13 per cent annual return over the three-year period under

consideration. Debt Funds: Debt could not have had more exciting times than the past couple of years with the Reserve Bank of India raising lending rates 13 times between March 2010 and October 2011. Click here to Enlarge Debt fund managers managed to generate decent returns in the past two years by taking advantage of attractive yields on short-term debt securities. LOOKING BACK In the past three years, while big names such as HDFC Mutual Fund, ICICI Prudential, Franklin Templeton and UTI Mutual Fund have consolidated their position in the industry, SBI Mutual Fund, with funds such as SBI Magnum Emerging Businesses, has rewritten the script after Magnum Tax Gain's downgrading. However, Reliance Mutual Fund, the largest fund house not so long ago and dethroned by HDFC Mutual Fund, needs to pull off something outstanding to regain its glory. Click here to Enlarge In this years Mutual Funds' Rankings, none of the equity funds from the fund house features among 5-star rated funds, though in 10-year period Reliance Growth beat all other equity funds with a 32 per cent average annual return. The year gone by also saw the exit of one of the country's best equity fund houses-Fidelity Mutual Fund. Click here to Enlarge Uncertainty in equity markets and a difficult regulatory environment made one of the world's largest fund manager call it quits in India. Fidelity won't be the last fund house to be sold. Murmurs of a few more exits are already doing the rounds. Notwithstanding the negative stories, we pay our tribute to fund managers who kept looking for corporate success stories amid declining earnings, shrinking order books and increasing exasperation over government's inability to push through economic reforms. Click here to Enlarge

For a change, we also tried to peek into the in-house processes and rules that guide fund managers in their efforts to consistently churn out benchmark-beating returns for investors. We must clarify here that the article does not try to discredit fund managers, but only reemphasise the fact that fund managers are bound by a set of in-house processes. CAVEAT While we strongly believe, fund rating does help investors in picking good funds, it is important for them to not look at ratings in isolation. Investors must also look at the financial strength of the fund houses and their ability to ride through ups and downs in business cycles. "Asset size of mutual funds is only a filtering parameter and is generally not used for rating purposes," says Anjaneya Gautam of Bajaj Capital. The exit of Fidelity has proved that star ratings alone won't work in the long term but asset size and quality also matter. RANKING METHODOLOGY There are 11 fund categories considered for this study primarily from the point of view of the interests of retail investors. Five of them are from the equity category: large-cap, large- and midcap, mid- and small-cap, multi-cap, and tax-saving; two from hybrid: equity-oriented and monthly income; and three from the debt category: short-term, income and liquid funds. We considered past three years data for equity and hybrid funds, and past 18-month data for debt categories. The methodology used to rank them was based on risk-adjusted returns. 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 currently 5.5 per cent, was assumed as the risk-free return. For months/weeks that the fund had underperformed the risk-free return, the magnitude of underperformance was added. This was then divided by the category average to get a risk score, which was ranked with those of other 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 monthly/weekly risk-free return to get the fund's total returns in excess of the risk-free return. The monthly average risk-adjusted return was then 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 then ranked with other funds of the same type and a relative return score assigned. All return estimations assumed reinvestment of dividend and were adjusted for bonus or rights. Finally, a composite risk-return score was obtained by subtracting the risk score from the returns score. Value Research Classification Value Research classifies diversified equity funds on the basis of their three-year average allocation to large-, mid- or small-cap stocks. Diversified equity funds with average three-year allocation to large cap stocks more than or equal to 80 per cent of portfolio are 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 considered. In the hybrid category, funds with average equity allocation of 60 per cent and above in the past three years have been classified as hybrid: equity-oriented funds and those with equity allocation up to 25 per cent as Hybrid: Debt-oriented. In debt category, funds with average maturity of 1-4.5 years in the last six months have been classified as short-term funds. Tags: mutual fund | Best mutual fund | invest mutual funds | equity fund | debt fund | hybrid fund