The Hindu Business Line : ICRA Online's basis for ranking

In the case of one-year ranking, complete disclosure of monthly portfolio should have been made for the past one year. In the case of three-year ranking, complete disclosure of quarterly portfolios should have been made for the past three years.

The scheme's fund size should be at least 5 per cent of the average fund size of the category. The average fund size of the category is calculated after classifying all schemes into various categories on the basis of asset allocation.

Any category should have a minimum of five schemes to be included for the ranking exercise.

ICRA Online classification of schemes

The classification of schemes has been done on the basis of the asset allocation and investment style of the schemes concerned. This is different from the traditional offer document-based scheme classification. The classification on the basis of asset allocation and investment style holds more relevance as these two factors determine the risk level of MF schemes.

MF schemes with equity exposure have been classified as Equity, Balanced, and Marginal Equity, on the basis of the extent of their equity exposures. The Equity schemes have been sub-classified into Diversified-Defensive, Diversified-Aggressive, and Sector schemes on the basis of their sectoral concentration judged over the period of analysis.

Debt-based MF schemes have been categorised on the basis of their average allocation to gilt securities and their average portfolio maturity. Further sub-classification into short term and long term has been done on the basis of the average portfolio maturity maintained over the ranking period.

ICRA Online ranking parameters

ICRA Online's ranking of Mutual Fund (MF) schemes based on several parameters of performance is aimed at helping investors and intermediaries identify the best schemes in the various categories. All the schemes that qualified were analysed over the one- and three-year horizons, against various parameters. ICRA Online's classification of the schemes was done on the basis of their investment style rather than their stated objective. The performance and suitability for investment were judged on the basis of various parameters that included return, volatility, fund size, average maturity, liquidity, portfolio turnover, and portfolio diversification.

Investor Expectation Ratio: ICRA Online calculated the risk adjusted return on the basis of an internally developed model called Investor Expectation Ratio (IER), which measures the performance of the scheme on returns posted over and above the investors' expectation, for every unit of risk assumed. The expected return is calculated as the average return posted by the peer group schemes.

Risk is calculated as the downside deviation of the return posted by the scheme from the peer group return. IER denotes the premium that the scheme has generated over the risk assumed by the scheme. Semi-standard deviation has been taken as the surrogate of risk. In the case of index schemes, the return score has been substituted by tracking error for performance analysis.

Portfolio concentration: MF schemes that do not have an adequately diversified portfolio carry a higher risk than well-diversified schemes. The extent of diversification has been judged on the basis of portfolio concentration across companies in the case of equity schemes and across sectors in the case of debt schemes. Company concentration has been judged taking NSE Nifty as the benchmark to decide the overexposure in any of the scrips in the portfolio. For debt schemes, the sectors considered are gilt; NBFCs; manufacturing companies; banks/FIs and non-financial/non-manufacturing companies. Overexposure to any of these sectors has been penalised.

Liquidity: Liquidity analysis has been done only for equity schemes. The liquidity coefficient was calculated as the weighted average of the liquidity coefficients of all scrips in the portfolio by taking the total number of shares in the portfolio of the scheme divided by the total daily turnover of the scrip.

Corpus size: Since a larger size of the scheme's corpus lends stability to an MF scheme during periods of high redemption pressure, preference has been accorded to large-size schemes.

Average maturity: Average maturity has been considered in the case of the debt, gilt and liquid categories. Schemes with higher average maturity carry higher interest rate risks as compared with schemes with lower average maturity.

Portfolio turnover: Schemes with low portfolio turnover have been preferred over those with higher portfolio turnover.

ICRA Online ranking notations

ICRA Mutual Fund Rating (MFR)1: Best performance (Top 10 per cent of the category)

ICRA MFR2: Above average performance (Next 22.5 per cent of the category)

ICRA MFR3: Average performance (Next 35 per cent of the category)

ICRA MFR4: Below average performance (Next 22.5 per cent of the category)

ICRA MFR5: Poor performance (Bottom 10 per cent of the category).

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