Methodology of Icra rankings

MUTUAL FUNDS/ICRA online rankings 2004

ICRA Online Mutual Fund (MF) Rankings seek to inform investors and MF intermediaries of the category-wise relative performance of MF schemes.

The rankings, covering the two time horizons of one and three years, have been arrived at following an in-depth analysis of critical parameters, including: risk-adjusted performance; portfolio concentration characteristics; liquidity; corpus size; average maturity; and portfolio turnover.

Eligibility Criteria for Ranking

• The Net Asset Value (NAV) of the MF scheme should have been disclosed daily during the period covered by the ranking.
• In the case of one-year ranking, complete disclosure of monthly portfolio should have been made for the past one year. For the three-year ranking, complete disclosure of quarterly portfolios should have been made for the past three years.
• The scheme's corpus size should have been at least 5% of the average fund size of the category. (The average fund size of the category was calculated after classifying all schemes into various categories on the basis of asset allocation.)
• Any category should have had a minimum of five schemes so as to be included for the ranking exercise.

Note: Only open-ended schemes were considered for the ranking exercise. The NAVs taken for the ranking were those of the schemes with the growth option. For schemes which did not offer the growth option, dividend-adjusted NAVs were considered.

Classification of Schemes

The classification of MF schemes was done on the basis of the asset allocation and the investment pattern 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 pattern holds more relevance as these two factors determine the risk level of MF schemes.

MF schemes with equity exposure were classified as Marginal Equity, Balanced, and Equity, on the basis of the extent of the equity exposure. Then they were sub-classified as Diversified""Defensive, Diversified-Aggressive, and Sector schemes on the basis of their sectoral concentration.

Debt-based MF schemes were categorised on the basis of their average allocation to Gilt securities. Then were sub-classified as Debt""Short Term and Debt""Long Term schemes, depending on their average portfolio maturity over the ranking period.

The Ranking Categories

The ranking categories defined in accordance with the classification discussed above were as follows:

• Diversified Equity Schemes""Defensive
• Diversified Equity Schemes""Aggressive
• Sector Schemes (Only Technology Funds considered)
• Index Funds (Nifty)
• Equity Linked Savings Schemes (ELSS)
• Balanced Schemes
• Marginal Equity Schemes/ Monthly Income Plans
• Income Schemes""Long Term and Short Term
• Gilt Schemes""Long Term and Short Term
• Liquid Schemes

The Ranking Parameters

• Return Analysis

Return analysis was done on the basis of the excess return generated per unit risk. The excess risk premium was taken as the average daily active return of the scheme (for the ranking period) over the average peer-group return. The downside deviation of the schemes' return from the expected return of the peer group was taken as the surrogate of risk.

Here the average peer group return was taken as the proxy for the expected return. A higher excess return per unit risk was taken to indicate better performance. In the case of Index Schemes, the Return Analysis was done on the basis of Tracking Error, wherein a lower tracking error was taken to indicate better performance.

• Portfolio Concentration Analysis

MF schemes that do not have an adequately diversified portfolio carry a higher risk than well-diversified schemes. While for equity schemes, company concentration was considered, sector concentration was evaluated for debt schemes.

Company concentration was determined taking NSE Nifty as the benchmark to decide the extent of exposure in any of the scrips in the portfolio. For debt schemes, the sectors that were considered are: Gilt; Non-Banking Financial Companies; Manufacturing Companies; Banks/Financial Institutions/Development Institutions; and Non-Financial/Non-Manufacturing Companies. Concentration in any of these sectors was penalised.

• Liquidity

Liquidity analysis was done only for equity schemes. In this case the liquidity coefficient for a scheme was calculated as the weighted average of the liquidity coefficients of all scrips in the portfolio. The liquidity coefficient of a scrip is calculated as 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 a Mutual Fund scheme during periods of high redemption pressure, credit was accorded to large-size schemes.

• Average Maturity

Average maturity was considered in the case of Debt, Gilt and Liquid categories. Schemes with higher average maturity are susceptible to higher interest rate risks as compared with schemes with lower average maturity.

• Portfolio Turnover

Schemes with low portfolio turnover were given a higher credit vis-à-vis those with a higher portfolio turnover.