Most fund ratings available today are based primarily on straight-line returns generated by funds over a period of 1, 3 or 5 years. There’s a big problem with this simple arithmetic. They imply that a fund’s past performance can predict how well the fund will do in the future. However, they do very little to tell you about the current state and expected performance of the fund.

Z-Funds goes many steps ahead in ensuring you get a better picture. Each quarter, we update the Z-Funds Mutual Fund Ranking based on an exclusive process created by our Research Team. In order to keep it simple for both the Retail Investor and our Independent Adviser Partners, we have used a process of categorization and eligibility to cut down the 3000+ funds (Open Ended Regular Plan funds with AUM greater than Rs. 50 Crores) to a more understandable format for quick reference. We have basically filtered millions of data points to a few simple-to-understand and relevant graphics for non-finance individuals and experts alike.

The Methodology? For those interested, read on…

Equity Funds

Shortlisting Criteria

• Regular - At ZFunds we are of the firm belief that unless you are a market expert, an adviser is a must. It is worth paying a small portion to your distributor or adviser for the right advice rather than lose a lot more investing wrongly.
• Growth – Since our review is based on long term views, we have used the growth plan for shortlisting of funds.
• AUM – Depending on the category, the minimum AUM for making the cut to the scoring ranges from ₹100 Crores to ₹3,000 Crores. In the case of small cap funds, we also have an upper limit of ₹6,000 Crores. This is to avoid risks disseminating from illiquidity in case of a steep selloff in the market.

• Fund Age – Only funds with an age of minimum 5 years (Edelweiss small cap is an exception) as on 31st December 2019 have been considered.
• Based on an extensive rating system
  • Return & Risk – We understand that past return cannot be the best method for predicting future performance. However, we cannot completely ignore what the fund has done so far either. A total weightage of 20% has been assigned to risk-return, where we have scored the following data points
    • 3- & 5-year alphas
    • Capture Ratios
    • Risk Adjusted Returns – Sortino, Treynor & Information Ratio
  • Valuations – The holy grail of investing. As we have seen, there are examples of various successful investors including Warren Buffet and Benjamin Graham, who have relied on valuations as a filter for stock picking. We however prefer to leave the task of identifying specific stocks to the fund managers. Based on Price-Earnings-to-Growth and Price-to-Book ratios we have scored the funds and have given valuations a weightage of 30% to 35% depending on the category.
  • Consistency – Past annualized returns is one thing, but to be able to achieve an alpha is quite another. In this segment we score the funds based on their rolling returns for the last 5 years and the standard deviation of their alpha for the last 5 years. If you prefer a large cap fund over a small cap one for its safety, you surely do not want to see 10% (+ or -) alphas every year. Based on the category we have assigned a weightage of 15% (to small caps) to 30% (to ELSS) for consistency.
  • Others – What good is a strategy if it’s not implemented correctly? The fund manager is a key component of a fund and we have scored them on their experience. Also, a weightage has been given to concentration – goes without saying, the higher the concentration, the lower the score. We have used stricter conditions to score concentration in small cap funds (you surely don’t want to get stuck here in the down times) as compared to large caps. These 2 factors have been given a cumulative weightage of 20% to 30%.

A Typical Scoring Sheet

Complete tables for all categories are given in the Annexures 1 to 5 at the end of this article. Kindly refer to them for scoring parameters and ratings.

Large Cap Funds

Large Cap Funds are those mutual funds that invest a larger portion of their funds in equity shares of large-cap companies.

The Securities & Exchange Board of India or SEBI categorizes companies whose market capitalization is among the top 100 in the market as Large Cap. Market Capitalization is defined as the market value of all outstanding shares and is achieved by multiplying the total number of shares outstanding by the market price per share.

Some of the characteristics of a large cap fund are as follows:

• Known to offer stable and sustainable returns
• Might be outperformed by Mid-Cap and Small-Cap funds as large caps are less risky
• Lower volatility compared to Mid-Cap and Small-Cap funds
• Suitable for investors with medium to high investment horizon
• Suitable for investors with low risk appetite
• The stocks held by the fund are highly liquid

The following are the top-rated large cap funds for the year 2020. The funds with the highest ZF Score (refer methodology) are ranked at the top.

1. Fund of Index Funds – Based on our belief that as depth in the large cap segment continues to expand, it is going to become increasingly difficult for active fund managers to beat the benchmark. Thus, given that generating alpha consistently is going to be a challenge, a long-term investor looking for stable returns, may be better off investing in Index Funds. Through various iterations we discovered that a mix of a Sensex Fund and a Nifty Next Fifty Fund in the ratio 3:1 would be the optimum allocation for a large cap exposure.
   • Rs. 10,000 invested in this hybrid in February 2015 would have been approx. Rs. 14,825.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 78,125.
2. Axis Bluechip Fund – One of the most consistent performers in the large cap space over the last 5 years. The fund has almost the complete corpus invested in giant (94%) and large cap (5%) stocks.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.16,700.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 87,600.
3. ICICI Prudential Bluechip Fund – Though not as consistent as the Axis Bluechip Fund, ICICI has been consistent in generating an alpha over the last 5 years. This fund primarily scores on the valuation parameter, which brings it to the 3rd position. Its small exposure (~6.5%) in the mid cap category gives it a slight diversification edge.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs. 14,600.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 76,000.

Midcap Funds

Midcap Funds are those mutual funds that invest a larger portion of their funds in equity shares of mid-cap companies.

The Securities & Exchange Board of India or SEBI categorizes companies whose market capitalization is between the 101st and 250th position in the market as Mid Cap. Market Capitalization is defined as the market value of all outstanding shares and is achieved by multiplying the total number of shares outstanding by the market price per share.

Some of the characteristics of a midcap fund are as follows:

• Higher chances of growth compared to large caps
• Chances of getting outperformed by large caps in a weak economy.
• Chances of getting outperformed by small caps in a strong economy.
• Lower volatility compared to small caps, but higher compared to large caps.
• Suitable for investors with high investment horizon
• Suitable for investors with medium risk appetite
• Most of the stocks are highly liquid

The following are the top-rated mid cap funds for the year 2020. The funds with the highest ZF Score (refer methodology) are ranked at the top.

1. ICICI Prudential Midcap Fund – Even though the fund has not been a consistent outperformer in the previous 5-years, the low average Price-to-Earnings and Price-to-Book bring it to the top of the tables.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.13,600.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 68,900.
2. Edelweiss Midcap Fund – Again scoring high on the valuations, this fund has been a rank outperformer in the last year.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.15,300.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 75,000.
3. L&T Midcap Fund – The one fund which has managed to outperform the benchmark (BSE Midcap - common benchmark for all funds in the category) in each of the previous 5 calendar years, makes it to the top 3.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs. 16,400.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 75,200.

Small Cap Funds

Small Cap Funds are those mutual funds that invest a larger portion of their funds in equity shares of small-cap companies.

The Securities & Exchange Board of India or SEBI categorizes companies whose market capitalization is in the 251st position or lower in the market as Small Cap. Market Capitalization is defined as the market value of all outstanding shares and is achieved by multiplying the total number of shares outstanding by the market price per share.

Some of the characteristics of a small cap fund are as follows:

• Higher probability of growth compared to large caps and mid caps
• Chances of getting outperformed by large caps and mid caps in a weak economy.
• Higher volatility compared to large caps and mid caps.
• Suitable for investors with high investment horizon
• Suitable for investors with very high risk appetite
• Stocks may turn liquid in case of selloffs

The following are the top-rated small cap funds for the year 2020. The funds with the highest ZF Score (refer methodology) are ranked at the top.

1. Edelweiss Small Cap Fund - The fund incepted on 7th February 2019, is an exception to our filter of fund age for shortlisting. Given the carnage in the small cap universe in 2018 and 2019, we are of the opinion that this fund was introduced at a very good time. It comes free of any ‘garbage’ stocks in it’s portfolio.
2. SBI Small Cap Fund - An outperformer for many years running. This fund lists at the top not only because of its outperformance in the up years, but even during market down trends it has not given up as much. Valuations may be slightly stretched, but given the impending rally in the small cap space, it may continue to do well.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.18,900.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 81,900.
3. Aditya Birla Sun Life Small Cap Fund - Even though this fund has been a laggard over the last 3 years, its valuation score pushes it to the top 3 in the small cap universe.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.12,900.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 60,800.

Multi Cap Funds

Multi Cap Funds are those mutual funds that invest across different market capitalization categories. They are not obligated to invest a certain proportion of their assets in any particular category.

Market Capitalization is defined as the market value of all outstanding shares and is achieved by multiplying the total number of shares outstanding by the market price per share.

Some of the characteristics of a multi cap fund are as follows:

• They provide a diversification since they invest across large caps, mid caps and small caps
• Lower expected volatility
• Suitable for investors with medium investment horizon
• Suitable for investors with medium risk appetite
• Fund manager has the leeway to increase allocation to a particular category based on market view

The following are the top-rated multi cap funds for the year 2020. The funds with the highest ZF Score (refer methodology) are ranked at the top.

1. Kotak Standard Multi Cap Fund - Consistent performer over the last 5 years. This fund has the largest AUM in the category.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.16,000.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 79,400.
2. ICICI Prudential Multi Cap Fund - Even though not the top performing fund in this category, it scores very highly on our valuation metric. A good option for long term investments.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.14,500.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 72,200.
3. SBI Magnum MultiCap Fund - The fund has been a consistent performer. Even though valuations appear slightly stretched, this Rs. 9,000 crore fund makes it to our top 3.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.15,800.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 76,700.

Equity Linked Saving Schemes (ELSS)

ELSS Funds are mutual funds that invest across different market capitalization categories. What makes these funds different from multi cap funds is that investments upto Rs. 1,50,000 in ELSS is eligible for deduction from taxable income under section 80C of the Income Tax Act. 

Market Capitalization is defined as the market value of all outstanding shares and is achieved by multiplying the total number of shares outstanding by the market price per share.

Some of the characteristics of a ELSS fund are as follows:

• They provide a diversification since they invest across large caps, mid caps and small caps
• Lower expected volatility
• Suitable for investors with medium risk appetite
• Highly suitable for clients looking to invest in tax saving options
• They have a lock-in period of 3 years
• Fund manager has the leeway to increase allocation to a particular category based on market view

Also Read: Difference between ELSS and ULIP

The following are the top-rated ELSS funds for the year 2020. The funds with the highest ZF Score (refer methodology) are ranked at the top.

1. Axis Long Term Equity Fund - A consistent outperformer with superior risk adjusted returns. This fund has been the star of the category for some time.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.16,500.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 84,000.
2. ICICI Prudential Long Term Equity Fund - The fund has lagged in the performance parameter compared to some of its peers. However, the superior valuations are positive.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.13,700.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 72,900.
3. IDFC Tax Advantage Fund - Another fund in the category which has not been a consistent performer. However, considering it is a well diversified fund with good valuations, we expect this fund to perform well.
   • Rs. 10,000 invested in February 2015 would have been approx. Rs.14,100.
   • Rs. 1,000 invested in monthly SIP since February 2015 would have been approx. Rs. 71,600.

Annexure 1 - Large Cap Fund Rating

Annexure 2 - Mid Cap Fund Rating

Annexure 3 - Small Cap Fund Rating

Annexure 4 - Multi Cap Fund Rating

Annexure 5 - ELSS Funds