When evaluating India’s best batsmen, would you make a distinction between Sachin Tendulkar and Dinesh Karthick, even if Karthick had scored more runs in a recent innings? You should. Tendulkar has played 139 Tests against Karthick’s 15. You have seen Tendulkar’s game over the years, against all kinds of bowlers and on different pitch conditions. In fact, a batsman should have played a minimum number of matches to qualify for the evaluation.

This reasoning becomes even stronger when evaluating mutual fund schemes. The older a fund scheme, the better it is to know how it has done over the years and in different market conditions. So the first step in ranking mutual funds was to decide which ones to include. But even before we got to choosing specific schemes, we had to select the fund types to pick schemes from — after all, different types (categories) of funds serve different investment purposes.

The six fund types we chose to study for ranking are the ones in which retail investors have the highest interest.

Returns (more specifically, percentage change in NAV) are the chief yardstick to judge a fund’s performance. But there are other factors that influence the performance of a scheme. Expense ratio (percentage of a fund’s assets taken out every year to cover for management fee) indicates the annual cost of investing in a fund.

Funds are less risky than stocks, but not entirely risk-free. Along with returns and costs, we also evaluated risk—risk of losing money as well as of underperformance. All this went into calculating the score of each fund in all six categories.

How risk is measured

Value Research calculates a fund’s risk of loss by comparing the fund’s performance against a risk-free investment such as the 45-179 day term deposit in SBI. The risk of investing in the fund not only includes the possibility of losing money, but also the chance of earning less than you would have on a guaranteed investment.

To calculate the risk, monthly/weekly fund returns are compared against the monthly risk-free return for equity and hybrid funds and weekly risk-free return for debt funds. For all months/weeks the fund underperforms the risk-free return, the magnitude of underperformance is added.

This gives the average underperformance and how a fund performed vis-a-vis its category average. The relative performance of a fund is expressed as a risk score, which is given below.