Research Process

5P Process for Mutual Fund Selection



The first 'P' focuses on the process followed by a particular mutual fund company. There are around 40 mutual fund companies with more than 7000 mutual fund schemes in the market. It is very important to assess if a particular company follows robust process for stock/bond selection. We rank these companies on the basis of the following criteria:

  • Consistency: Does a company follow its mandate consistently? For example some companies may take higher exposure to mid cap stocks even for schemes that are classified as large cap. They may do it to chase returns. In the bargain they may expose their customers to higher risk. We filter out such mutual fund companies. Key Metric: % Large cap; % Mid&Small cap
  • Compliance: How much do they comply to SEBI guidelines? Do they follow a practice of tweaking SEBI guidelines? For example, even though SEBI mandates a max. 10% exposure in a particular group, some fund houses may find a work-around to increase the exposure beyond 10%, thereby exposing their investors to unsystematic risk. Key Metric: Max. exposure of a particular group.
  • Quality: What is the quality of bonds that they are selecting? Are they taking low credit bonds to chase returns? For example, a debt mutual fund can invest a significant portion in lesser than AA rated bonds that may increase the investment risk significantly. Key Metric: %AA & above paper.



The second 'P' focuses on the price that we are pay for a particular investment product. Just like price is an important factor when we buy any personal product like garments, handset etc., it is important to ensure that we pay a reasonable price for any investment product that we invest in. Following factors enable us to evaluate the fair price of an investment product:

  • Margin of safety: When we select a mutual fund or any investment product, one of the most important factor that we look for is the margin of safety. More the price that we pay for an investment product, the lesser the margin of safety. Investing into products which are under-valued ensures that the downside risk is limited and the hard earned money of our investors is not getting subjected to undue risk. Key Metric: Price / Earning Per Share; Price / Book Value.
  • Management cost: Each investment product has an underlying management cost associated with it. We ensure that the management costs are justified and in line with the performance of a particular mutual fund. Key Metric: Expense Ratio.
  • Cost of exit: Some mutual funds charge an exit load if you need to withdraw the investments before the stipulated time. For most of the equity funds the exit load is 1% if redeemed within one year of investments. But some funds put a higher time-frame as well. We ensure that we don't get stuck with an investment product for a long period of time. We should be free to change the investments if a particular product is not performing well. Key Metric: Exit Load



The third 'P' focuses on the risk adjusted performance of a particular investment product. Following criteria are considered:

  • Past returns: We look at long term performance of mutual funds. We filter out funds which are not consistent in their performance and give temporary spikes which is generally unsustainable. We like funds that outperform in longer duration which should be at least more than three years. Key Metric: 3 year return, 5 year return, 10 year return
  • Volatility: Since a significant part of the portfolio that we create gets invested in equity and equity related investments, the portfolio gets subjected to market volatility. There are innumerable global and domestic events that are beyond our control. As a result the investment corpus may go up or down based on market volatility. Though we cannot eradicate the market based volatility from our investment portfolio, we can choose the investment products which manage the volatility better than the broader markets. Key Metric: Standard Deviation.
  • Comparative performance: A key factor under consideration is the comparative performance with the benchmark and peer group of the respective mutual fund. Key Metric: Sortino Ratio.



Portfolio allocation of each fund - For example: How much Large Cap Vs Mid Cap, Small Cap. Allocation to particular sectors like Financials, Capital Goods, Technology etc. Once a particular fund passes through the top 3 filters above, a detailed analysis is done on the quality of stocks or debt papers held by the particular fund. In our final portfolio composition, we try to minimize the portfolio overlap between various funds. We believe in optimum level of diversification.

Portfolio creation based on customer's risk profile. There are three broad categories of customers viz. Aggressive, Moderate and Conservative. Portfolio composition for each category will be different.

The portfolio composition also takes into account the tenure of the goal and current market conditions when the portfolio is composed.

Key Ratios

  • Investment Grid
  • % Overlap in the portfolio
  • % of Large Vs Mid Vs Small Vs Sector in the portfolio
  • % of Short Term Vs Long Term Papers



High quality management team is one of the most important ingredient for any investment product to outperform in the long run. Even if a particular fund has performed well, we equally need to track its management team and changes to the fund management team over a period of time.

Key Ratios

  • Alpha generated
  • Years of Experience
  • Performance of the fund manager compared to her peers
  • Stability of the management team

Past Performance

Annualised Return:

Max. Annualised Downside:

*All returns are shown for a regular investment of 30,000 on the 1st of every month. Performance prior to 2013 is based on sample back testing.

* Past performance does not guarantee future returns