Top wealth-creators

The funds that generated the highest wealth for investors over a five-year period starting November 2000 were Franklin India Prima, Magnum Contra Fund, Reliance Growth, HDFC Long Term Advantage Fund and Reliance Vision. Every Rs 100 invested in these funds would have grown six- to eight-fold over the five-year period.

The choice of fund would have made a big difference to the size of your take at the end of five years. Every Rs 100 invested in the top five funds would have grown at least to Rs 600 over the five-year period. But it would have become just Rs 300, if you had picked an average performer.

Had you, by some quirk of fate, put your money in the bottom-of-the-rung fund — ING Vysya Select Stock Fund — you would be left with Rs 111 for every Rs 100, after a five-year wait, despite a protracted bull market.

We considered only diversified equity funds for this shortlist, but did not distinguish between funds based on their allocation to mid-cap stocks. This is because the boundaries between large and mid-cap funds have blurred in recent times. Most equity funds now invest a part of their portfolio in mid-cap stocks; only, the proportions vary.

The definition of a "mid-cap" stock is also fluid. For instance, because of its tendency to invest in well-known names, the portfolio of Franklin India Prima — a mid-cap fund — is comparable to that of several equity funds that do not have a specific mid-cap orientation.

More funds beat benchmarks

In this five-year window, as in the previous one, fund managers beat the indices hands down. In fact, the number of funds outpacing the market went up. A sum of Rs 100 invested in the Nifty or the Sensex would have doubled to Rs 200 if held for the entire five years. But 80 of the 95 equity funds managed to more than double investor's money.

With funds actively dabbling in less-known names outside the index basket, the Sensex and the Nifty appear to have become less relevant as benchmarks for fund performance.

Equity funds did, however, fare well, even when measured against tougher benchmarks such as the BSE-500, which capture the action across a larger segment of the market. Sixty of the 95 funds beat the BSE-500 over a five-year period. This suggests that fund managers padded their portfolios with the right stocks from the medley of choices in the mid-cap space.

There's more competition

More fund houses notched up a good five-year performance in one or two of their funds. Select funds from PruICICI Mutual, Tata Mutual, Taurus, Principal and UTI jostled with those from HDFC Mutual and Reliance Mutual for the top ten places. HDFC Mutual Fund and Reliance were the only houses to have more than one representative each in the top ten.

Franklin Templeton, which hogged the five-year return rankings until last year, slipped, with only the Prima Fund making it to the top ten.

Franklin Bluechip Fund and Templeton India Growth fund, both exceptionally good performers in the previous five-year window, notched up much lower absolute returns this time and just about made it to the top quartile.

Portfolios loaded with blue-chip stocks and a preference for oil and banking sectors prevented these funds from capitalising on some of the lucrative money-making opportunities. Poor performance over the past year marred the track record of funds such as Alliance Tax Relief (now Birla Sun Life Tax Relief), pushing it into the laggards list.

This year's upsets offer investors a couple of lessons. One, when making choices, it pays to go by the specific fund's track record, rather than by the banner it represents.

Not all of the HDFC and Franklin Templeton funds have excelled in creating wealth.

Both HDFC Long Term Advantage Fund and HDFC Growth come from the same house, yet one has multiplied money six-fold while the other has barely managed to double it. A red flag for those of you who invest in a new fund because it comes from a big banner!

Second, spreading your investments across two or three funds and periodically reviewing performance are necessary, as even the best funds can slip up.

Tax funds score high

Confirming the trend noticed over shorter time-frames, a good number of tax-planning funds bettered their plain vanilla counterparts in generating wealth over a five-year period. In a few cases, there were yawning gaps between the returns numbers for the tax-planning funds and the plain equity funds, from the same fund house.

HDFC Long Term Advantage Fund (540 per cent over five years) was better than HDFC Equity (370 per cent). PruICICI Tax Plan (422 per cent) was vastly superior to PruCICI Power (241 per cent) and Sundaram Taxsaver (276 per cent) beat Sundaram Growth (218 per cent).

Some of the difference is attributable to the fact that several tax -planning funds loaded up with mid-cap stocks, while their plain cousins stuck conservatively to large-caps.

However, the three-year lock in period does enable fund managers to take a considered view on stocks without getting obsessed about how a stock choice will impact short-term performance.

On the other hand, close-end funds did not do as well as one expected; though they give the fund manager even greater stability. Birla Taxplan 98 was the only close-end fund to make it to the top quartile based on five-year returns.

Many of the other close-end offerings were bunched up in the third quartile. Morgan Stanley Growth Fund managed to grow every Rs 100 to Rs 275 over the five-year period.

This was better than the index, but substantially lower than the four- to eight-fold appreciation managed by the top 10 funds.

The key questions

SIFTING through funds on the basis of five-year return numbers helps you get at those that best weathered an extended stock market cycle. This is especially true when the five-year period encompasses a bearish trend as well as a bullish phase for the stock market, as this one did. However, you do have to keep the following factors in mind while evaluating a fund's five-year track record:

Has the fund's management changed hands? If it has, the investment style, fund manager and stock selection, which probably contributed to its good performance in the past, may have changed. Wait a year or two before adding it to your portfolio.

Has the fund changed course? If a sector or theme fund has transformed itself into a diversified fund, its track record before the change will not be relevant to your analysis. Wait for the fund to accumulate a track record under its new avatar.

How good is the fund's recent performance? Do not consider funds that have a good five-year record but have under-performed their benchmarks or a good number of their peers, for the latest year. Despite a great five-year record, investments in the Birla Sun Life Basic Industries Fund, Principal Resurgent India Fund and UTI Master Value should probably be on hold now, because of these funds' unimpressive returns over the past one year.

Consistency of the fund should rank above high absolute returns. Even a five-year winning streak may be the result of riding piggyback on a specific theme (say, PSU stocks) or assuming more risks (going all out on mid-cap stocks). Check how evenly the fund has generated its returns over the past five years. Add funds that have managed to figure high in the return rankings every year and have weathered market declines well.

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