Our Fund Selection Process

Funds with a relatively smaller size generally don’t get the requisite management bandwidth. This is because a small fund may not be profitable for the asset management company. Hence, they may not be interested to put their best resources to manage the funds with smaller size.

Next question is what size is considered to be decent enough. Size varies for each category of mutual fund. For example, if we want to create a filter for large-cap mutual funds, we may filter out all mutual funds with less than 5000 Cr fund size. However, for a small-cap mutual fund, we may consider all funds with more than 1000 Cr fund size.

Another interesting point to note is that funds with a very large size may also not be good. This is because it is not easy to manage very large funds. Moreover, the choice of stocks for the fund manager gets limited. For instance, a fund has a size of 30,000 Cr. Now, to add a stock to this fund’s portfolio, it should have a very large market-cap. Else, it will not be possible for the fund manager to add that stock in the portfolio. Hence, we also filter out funds which are very large is size.

Second filter is to weed out funds based on their past performance. We generally consider Previous 3 years Annual returns (JAN-DEC) and quarterly returns for this filter. We filter out funds which are not consistent in performance.

Third filter is the volatility (or the standard deviation) of the fund. We further filter-out funds that have higher volatility than the mean of each category. Essentially, we don’t want to invest in funds that show rapid short-term movement in either direction. Idea is to avoid funds that have shown good performance just because of some short-term spike. We want to invest into funds that show much better consistency.

The results into a list of around 10-15 mutual funds in each category. All the noise is filtered out and we are ready to do the real job on hand. We then carefully analyse the management team of mutual funds, Investment process of AMC, Other ratio (Sharpe, Sortino and Beta), Exit load, portfolio composition.

Please note that the information & tools provided above is only for education purpose and we are only Distributors to execute the transaction on the instruction of investors.