Professional Documents
Culture Documents
Mutual Fund Selection Process
Mutual Fund Selection Process
Product Selection
Suite August Process
2018
Mutual Fund Selection Process - Objective
The endeavor of our selection methodology is to select a basket of funds which would deliver an
alpha of 4% p.a. over and above Nifty.
Our strategy :
To select a set of schemes which have high probability of being top quartile performers in their
respective category. This, we believe, will lead to us achieving our core objective of achieving 4%
p.a. Alpha over Nifty.
Mutual Fund Selection – Categorization of Funds
Categorization of Funds: Funds with similar investment mandate are categorized to have a fair
comparison. The below 5 categories are recommended for investing.
Large Cap Mid Cap Funds Multi Cap Small Cap Focus Funds
Funds Funds Funds
Total No. of
Schemes post 30 19 52 11 13
filter
Final
Selected 1 2 3 1 1
Schemes
Mutual Fund Selection – Why certain categories are eliminated
While it is important to know what should be done, it is equally important to know what should not be done.
Out of the total universe of 457 open ended equity schemes, 411 schemes meet the filtering criteria
mentioned previously.
Of these 411, 125 schemes fall in our defined category, the remaining 286 schemes are eliminated for reasons
mentioned below:
Step 1 – To identify funds that Regression analysis is The outcome of the process
Quantitative display (i) superior stock used to identify 6 is relative ranking of funds
screening of picking capability of the fund parameters that analyze i.e. the 38 funds are ranked
funds manager, (ii) consistency of funds to meet stated and tagged into quartiles
alphas at reasonable levels objective. with the top 25% of the
of risk (iii) are available at universe being top quartile.
attractive valuations. (i.e. top 9 schemes being
Quartile 1)
Step 2 – Long term performance is Long term stability of the We superimpose our
Fund House and associated to some other fund management team, judgment in this step on the
Investment qualitative parameters profitability of AMC and outcome of Step 1 to select a
Team Due which are evaluated in this risk policies are basket of 9-10
Diligence step. evaluated. recommended funds.
Mutual Fund Selection : Step 1
This ratio measures extra return generated by fund for every unit of
Treynor Ratio 20% market risk taken. Thus encouraging Fund mangers who generate higher
Risk Ratios returns per unit of risk taken.
Standard Deviation tells the total risk taken by the fund managers while
Standard Deviation 15% achieving the returns.
Consistency of Standard Deviation Ranks funds manager’s with consistent alpha relative to others.
15%
Alpha of Alpha
Evaluates how much are we paying for the underlying earnings growth of
Valuation PEG Ratio 15% the fund. A lower ratio indicating that we are paying less price for the
underlying earnings growth vis-à-vis others
It captures fund managers stock picking capability by taking the high
conviction stock calls of the fund manager (excluding those stocks that are
Fund Manager
Stray Ratio 15% part of benchmark) to see if they contributed to alpha generation and
Performance
inturn were right decisions.
Fund Manager with a high hit ratio relative to others are preferred.
All funds in the category are ranked on relative basis the top 25% of the universe is shortlisted for next step of evaluation.
Mutual Fund Selection : Step 2
• Low correlation among themselves – to ensure they do not throw out same output.
o E.g. – Existing parameter MRAR has a 0.86 correlation with Treynor and 0.96 correlation with
Past Returns.
• High correlation with future performance (Measure used mean absolute deviation {MAD}) – to
ensure better predictability of future performers.
o The fund may rank 1st basis parameter but ranks 10th basis next 1 year performance. So, the
absolute deviation is 9.
o E.g. – according to back testing Upcapture and Downcapture ratio had a MAD of 26 – 29
whereas PEG ratio had a MAD of 24.
o All other parameters had a MAD in the range of 20 to 27
Monitoring of Recommended Funds
The recommended mutual funds are tracked on a quarterly basis to ensure the funds selected are leading us
to our desired objective.
Step1 → If a recommended fund drops in quartile, it is put on Hold for any further investment.
Step 2 → Attribution analysis is conducted and fund manager discussions are held to check if the fund
manager is taking any corrective action to improve fund performance.
Step 3 → If within 3 months, improvement is noticed, the fund is put back on recommendation. If no
improvement noticed with no action by the fund manager, we recommend to exit from the fund.
THANK YOU
Disclaimer:-This report has been issued by Anand Rathi Financial Services Limited (ARFSL), which is regulated by SEBI. The information herein was obtained from various sources; we do not
guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or
other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this
issuer(s) or in related investments, and may be on the opposite side of public orders. ARFSL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this
issuer(s) or in related investments. ARFSL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity
mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any
specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in
this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each
security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any
security or related investment mentioned in this report.