h t t p s : / / a n u p a mr o o n g t a .

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DISCLAIMER

Although the author and publisher have made every effort to ensure that the information in this
book was correct at press time, the author and publisher do not assume and hereby disclaim any
liability to any party for any loss or damage caused by errors or omissions, whether such errors or
omissions result from negligence, accident, or any other cause.

This book is not intended as a substitute for the financial advice. The reader should regularly
consult a financial advisor in matters relating to his/her individual investment needs.

You should seek the services of a competent professional financial advisor before investing in
Mutual Funds.

Mutual Fund investments are Subject to Market Risk, always read the scheme related documents
before investing.

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WHAT IS EQUITY MUTUAL FUND (MF)

As the name suggests, the Equity Mutual Funds are mutual funds, which primarily invest
in stocks.

This is the most popular category of mutual funds.

When an investor is talking about mutual funds in general, without specifically mentioning
the kind of mutual fund, it is widely understood that he is talking about equity funds.

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TYPES OF EQUITY MFs

SEBI has defined the categories of all Mutual Funds.

They have mandated that each fund house will have maximum 1 fund in each category
(except Sector/ Thematic category).

There are 12 types (categories) of Equity MFs in the Indian stock market.

Each of the categories has a different style of investing in the market, and they all differ in
their risk and reward characteristics. However, the general philosophy of investing in an
equity scheme remains the same, i.e. to build wealth.

S. No. TYPES OF EQUITY MF

1. Large Cap Funds

 Large Cap companies are the Top 100 Companies in the Indian stock market
by Market Capitalisation i.e. by size.

 Large Cap Funds have to invest a minimum 80% of their total assets in the
large cap companies.

 Total Assets means the total investment value of a scheme. Example, if a

scheme is managing Rs.2,000 crores of total assets, then at least 80% of this
(i.e. Rs.1,600) must be in Large Cap companies only.

 The remaining 20% (Rs.400 crores) can be in mid cap, small cap, others or in the
form of cash.

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2. Mid Cap Funds
 Mid Cap companies are defined as Top 101st - 250th companies by Market
Capitalisation, in the Indian stock market.

 Mid Cap Funds have to invest minimum 65% of their total assets in the Mid
Cap companies.

3. Small Cap Funds

 Small Cap companies are defined as 251st company onwards by Market
Capitalisation, in the Indian stock market.

 Small Cap Funds have to invest minimum 65% of their total assets in the Small
Cap companies.

4. Multi Cap Funds

 These funds have to invest in 25:25:25 proportion across Large, Mid & Small
Cap companies. That is, minimum 25% investment is required in each of the
three categories of the market cap. The remaining 25% can be invested as per
the choice of the fund manager.

5. Large & Mid Cap Funds

 In this category, the fund is mandated to invest minimum 35% of total assets in
Large Cap Stocks and 35% in Mid Cap Stocks.

 Rest they can invest anywhere.

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6. Tax Saving (ELSS)
 These are Multi Cap funds with 3-years lock-in.

 They provide Tax benefit under Sec 80C.

 The fund can invest in any stock across Large, Mid & Small Cap stocks.

7. Contra/ Value Funds

 These are Multi Cap funds but follow a contrarian or value investing strategy.

 The fund manager focuses on investing against the prevailing market trend in
assets that are performing poorly and selling them when they perform well.

8. Focussed Funds
 These are Multi Cap funds but focused on fewer number of stocks (maximum
30).

9. Dividend Yield Funds

 These are Multi Cap funds which invests primarily in high dividend yielding
stocks.

 Dividend yield for a stock is ratio of company's annual dividend compared to its
share price.

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10. Sector Funds
 These Equity Funds invest only in a specific sector.

 Example, IT, FMCG, Banking, Infra, Pharma, etc.

 They have to invest minimum 80% of total assets into that particular sector.

11. Thematic Funds

 These Equity Funds can invest in any specific theme such as only MNC stocks,
only consumer driven companies’ stocks, only companies with reach in Rural
India etc.

 They have to invest minimum 80% of total assets into that particular sector.

12. International Funds

 These funds invest in stocks of global companies listed outside India.

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HOW TO SHORTLIST EQUITY MUTUAL FUND SCHEMES?

1. FUND MANAGER
Fund managers take decisions of buying and selling of stocks
in the scheme, based on their research and knowledge.

The credit/ responsibility for outperformance or underperformance of a mutual fund

scheme lies with the fund manager (and his/ her research team).

Look for the following information on the fund manager:

 Since when is the current Fund Manager working with the scheme - longer the better.

 Skin in the game: The amount of investment made by the Fund Manager himself in
the schemes which he is managing.

 How has been the scheme performance during his/her tenure – how are the returns
compared to other schemes in the same category.

 If the fund manager is a new recruit in a mutual fund company (usually called Asset
Management Company or AMC), how has been his/her performance in the past
schemes?

2. EXPENSE RATIO
In simple terms, this is the annualized charges incurred by an
investor for investing in a mutual fund scheme.

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There are various costs incurred by an AMC to manage a scheme.

This includes, salaries of fund management team, agent/distributor commissions, legal

& audit fees, and selling & promoting expenses, among others.

These costs are recovered through its unit holders (that is the investors) on a daily basis.
The daily Net Asset Values (NAVs) of a scheme are reported after deducting these
expenses.

Lower the expense ratio, the better it is.

But this does not mean that we ignore high expense ratio schemes.

All the parameters have to be looked together and a balance has to striked.

3. FUND PERFORMANCE
Look at the past returns of the Mutual Fund Scheme. This can
be checked on various website which provide data on the past
performance.

To ensure the scheme has the capability of performing over the long-term, look for at
least 5 years of performance, preferably 10 years.

It is not advisable to choose a scheme based on last few months or 1-3 years of
performance. Having said that, a declining performance in the last 1-3 years can be a
matter of concern.

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Look for reasons because of which the scheme underperformed in the last few years and
if these reasons are temporary in nature.

Listening to or reading Fund Manager’s interviews can also throw some light on the
current performance of the scheme and the reasons for the same.

Note that the past performance is not a guarantee of future performance, but this is still
an important parameter to look at while shortlisting a scheme.

4. ROLLING RETURNS
This is same as checking fund performance, but it gives more
insights into the consistency of the performance.

Let’s say we have to calculate 5 years rolling return for the period 2010 to 2020.

Our first data point will be returns from 1st Jan 2010 to 1st Jan 2015. Next data point
will be returns from 2nd Jan 2010 to 2nd Jan 2015 and so on till the last data available.

This way all possible 5-years period from 2010 to 2020 would be covered.

This is how daily rolling returns are calculated for 5 years’ time period. Monthly and
weekly rolling returns can also be calculated.

Let’s say you are looking at 5 years rolling returns of a scheme and it has never given
negative returns in this time frame. This means the scheme’s fund managers have done
a great job so far.

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This can be one of the shortlisting criteria for the MF schemes.

There are various websites which provide data for rolling returns. A simple Google
search will help you with this.

5. TURNOVER RATIO
Portfolio Turnover Ratio is the churn of the fund portfolio or
the percentage of the portfolio holdings (i.e. stocks) that have
changed during the last year.

Portfolio turnover is calculated by dividing either the total purchases or total sales,
whichever is lower, by the average of the net assets of the scheme/fund.

A low turnover indicates that the fund follows a buy and hold strategy and that the fund
manager has high conviction in picking the stocks (i.e. they do not change their decisions
every now and then).

High portfolio turnover indicates high transactions and therefore higher trading costs,
which ultimately impacts investor returns.

This does not mean that higher turnover scheme has to be a bad investment. However, a
high turnover with average or below average track record is a red flag.

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6. AUM (ASSET UNDER MANAGEMENT)
Size Does Matter...!!

Asset Under Management is the size of the scheme i.e. the total
amount of investment which is managed by it, for all the investors put together.

AUM usually rises when the scheme delivers good returns consistently, as it naturally
attracts new investors.

The issue with high AUM is that the fund manager may not have enough opportunities
(i.e. good stocks) to invest in.

There are guidelines (limits) set by the regulatory authority in terms of the maximum
investment a scheme/ fund can make in a particular stock.

But if there is a continuous inflow of funds from the investors, the fund manager has to
invest in new stocks, even if his conviction is not high in them.

This may lead to poor performance of the scheme over the next few years.

This is a dilemma for the fund manager, as good performance leads to high AUM and
this in turn can be counter-productive for the scheme in future.

That is why looking at past performance of a scheme is not a good enough reason to
invest.

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There are exceptions and this criteria does not have objectivity to it. That is, we cannot
pin-point the ideal size (AUM) a scheme should have.

As an investor/ advisor, you must study the patterns and look for changing trends with
respect to how does the size impacts the performance of a scheme.

7. ALPHA
Alpha indicates the scheme’s ability to generate excess
returns compared to the market. Higher the Alpha, the better
it is.

A negative Alpha is an indicator that you must review your mutual fund scheme.

8. BETA, SHARPE RATIO AND STANDARD

DEVIATION
I do not look at above parameters though a lot of website
provide figures for the above-mentioned ratios.

These ratios typically measure the risk or risk-based performance of a scheme. Here, risk
is defined as fluctuation in the scheme, i.e. volatility.

In my opinion, risk and volatility are two different concepts and should not be mixed.

The other 7 parameters which I have shared above should be enough to help you shortlist
fundamentally strong Equity Mutual Fund schemes.

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 THANK YOU!
This brings us to the end of this eBook.

I hope it added value to you and it would help you identify good Equity Mutual Fund
schemes.

If you are taking services of an advisor, this will also help you ask relevant questions to
him / her and have a more meaningful conversation.

HAPPY INVESTING...!!

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