Check out funds that have fared well in different time spans

One of the simplest ways of selecting mutual funds is by looking at their historical performances and picking the top performers. While it is easy to come across fund listings that represent best performers, these are based on a single time scale. So, a listing may show top performing funds on the basis of 3-year or 5-year returns. A fund can be a top performer on one time scale, but may be an underperformer in another.

Take the DSPBR India T.I.G.E.R Fund, which has outperformed its benchmark on a 5-year scale, but has fared worse than its benchmark on the 3-year scale. In three years, the fund returned 6.34% on an average, compared with its benchmark BSE-100, which delivered 7.89%. On the other hand, the fund delivered 8% annualised returns over a 5-year period, in comparison to its benchmark that delivered 7.73% returns. This implies that a person who had invested in 2006 would be better off than a person who had invested in 2008.

Now, consider the Taurus Infrastructure Fund, which has lost 25% in the past year in comparison to its benchmark BSE-200, which lost 15.08%, thereby underperforming its benchmark on the one-year scale significantly. However, the same fund is an outperformer on a 3-year scale, delivering 9.9% annualised return in comparison to its benchmark, which gave 8.32%.

Therefore, the listings for top performing funds that are based on single time scales may not represent true outperformers. Instead, an analysis based on multiple time scales may prove useful for the investors who strongly rely on historical performance. We tried to zero in on funds that have given better results than their benchmarks and category averages consistently across different time scales.

Outperformance would imply either gaining more than the benchmarks and category averages or losing less than the benchmarks and category averages. We have considered six time scales, ranging from three months to five years. The performances of these funds were compared with their benchmarks and category averages across these time scales. Though the time frames of three months and six months are too short for evaluating equity mutual funds, such scales are considered to check the funds' short-term consistency.

We analysed as many as 349 equity mutual funds schemes with growth options. All equity schemes are included in the analysis, and include diversified, tax plans, sector funds, dividend yield funds, contra funds, mid-cap and small-cap funds. We considered only mid- to large-sized funds and ignored the smaller ones. The equity funds whose latest available corpus was more than Rs 100 crore were included. We found 14 funds that were consistent in their performance.

These 14 mid- to large-sized funds have outperformed their benchmarks and category averages in 3 months, 6 months, 1 year, 2 years, 3 years and 5 years. One would have fared well irrespective of the time scale in which the investment was made and, hence, these funds are true outperformers. In this list, UTI AMC tops with its five funds. Franklin AMC shares the second spot with three funds, while BNP Paribas, Canara Robeco, IDFC, SBI, Tata and Sundaram AMCs have one fund each.

Tata Dividend Yield Fund's AUM grew by almost 56% in the past year from Rs 150.74 crore in July 2010 to Rs 235.02 crore in July 2011. On the other hand, IDFC Premier Equity Fund's AUM shot up by almost 44% in the same period from Rs 1,674 crore in July 2010 to Rs 2,411 crore in July 2011.

Most of the shortlisted funds also scored on the portfolio turnover ratio, which reflects how frequently assets within the fund are bought and sold by the fund manager. Generally, the lower the ratio, the better it is because lower ratio signifies lesser transaction costs. A majority of the shortlisted funds have reduced their portfolio turnover ratios in the past year. The UTI Opportunities managed to slash it by more than 51%, followed by UTI Equity and Tata Dividend Yield Fund, which reduced their ratios by 46% and 45%, respectively.

Source: http://articles.economictimes.indiatimes.com/2011-09-26/news/30204446_1_mutual-funds-benchmark-scale/2