Why we should celebrate the tortoises

Wouldn't it be great if you could turn back the clock by three years and invest in the best performing equity fund of 2007? JM Basic gave 112 per cent returns in that year compared with the category average of 59.5 per cent. However, the fund crashed out of sight in 2008, with a loss of 75 per cent compared with the category average of 55 per cent. But before investors could let out a sigh, the fund bounced back with a 100 per cent return in 2009. Isn't this a spectacular performance? We don't agree.

Stability in performance and consistency of returns are the two most important features that investors look for in mutual funds. As any financial planner will tell you, a slow and steady rise is better than an erratic performance. Had you invested Rs 1 lakh in JM Basic during the euphoria in May 2007, your investment would be worth about Rs 92,000 by 30 April 2010. Compare this with the returns of HDFC Top 200 Fund, where your investment would have grown to Rs 1.68 lakh. No three-figure returns. No scintillating numbers. The HDFC Top 200 Fund has never been among the top 10 performers in the past five years. It doesn't even figure in our list of best equity funds this year.

Yet, this large-cap-oriented fund is among the most consistent wealth creators in the crowded universe of diversified equity funds. It might not have done as well as some mid-cap funds during the bull runs, but then it has not fallen as hard during the bear phases. Managed by Prashant Jain, the Rs 7,000 crore fund proved its mettle in 2008, when it fell only 45 per cent compared with the 55 per cent drop in the category average. In the past five years, it has given annualised returns of 30.35 per cent. For the past 10 years, this figure has been an envious 27.77 per cent. An investment of Rs 10,000 in the fund on 1 May 2000 would be worth Rs 1.16 lakh today. During the same period, the BSE 200 rose 15.84 per cent. Whoever said mutual funds can't match the returns from stocks can eat his words.

We have considered the long-term performance of funds to identify 10 such consistent wealth creators. Value Research has a robust star rating system based on the long-term performance and risk-adjusted returns. The results were surprising as well as flattering. Six of the 10 most consistent performers had figured in our 2007 list of best equity diversified funds. This validates our ranking and the rating system developed by Value Research. These schemes should form the core of an equity portfolio for any mutual fund investor.

One big benefit of investing in these allweather funds is that your Valium bill comes down. A consistent fund carries lower risk and is less volatile. "If a fund is consistent, then the entry and exit timings should not matter," says Anup Maheshwari, fund manager, DSPBR Mutual Fund.

According to financial planner Gaurav Mashruwala, the fund manager's tenure is crucial for the fund's stability. Funds also perform consistently because the fund manager has been at the helm for a long period. The Franklin India Prima Plus Fund, for instance, has not seen a change of fund managers since its launch in 1994. Sukumar Rajah has steered the fund through thick and thin to deliver annualised returns of 23.35 per cent in the past 10 years. In five of the top 10 consistent funds, the fund manager had been at the helm for over five years. In the remaining five, three funds have seen no change in the past three years and two got new managers in 2008.

"Funds often deviate from their philosophy to gain extra returns. This makes it imperative to look at the performance of a fund vis-a-vis the benchmark and its peers, along with risk ratios like beta, which is the measure of a portfolio's sensitivity to market movements, and R square, the correlation of a fund with its benchmark index," says Mashruwala. At the same time, ratios like Standard Deviation (SD), the measure of the historic volatility of a portfolio, explain the fund’s varying performance.

DSPBR Opportunities Fund features among the funds with low risk grades. Though it has not been a stellar performer, it has managed to deliver consistent returns. "Staying in the first or second quartile in the performance matrix is good enough as long as the fund is able to generate consistent returns," says Maheshwari. It was initially positioned as an aggressive fund, but adjusted its exposure to market movements, and now carries a relatively diversified large-cap portfolio. During 2008 and early 2009, the fund underperformed due to its exposure to oil marketing companies. At the time, it invested in defensives, which didn't allow it to participate in the rally.

Often, consistency is regarded as underperformance in a bull market, especially when other funds perform better. ICICI Prudential Power Fund refrained from investing in high-risk and high-beta stocks that have seen a major rise recently. Sanjay Parekh, fund manager, ICICI Prudential Power Fund, says that even though the fund underperformed, it remained consistent because it stuck to the fund's philosophy. Parekh says, "The fund is focused on its top 10 holdings, comprising 60 per cent of the portfolio, but it maintains an adequate margin of safety while investing. Currently its mid-cap exposure is restricted to 20 per cent for alpha generation."

Almost all consistent performers fall in the low to medium risk grade, with the exception of the Sundaram BNP Paribas Growth Fund, which has a high risk rating.

In recent years, the fund has seen some underperformance compared with its category average. "The calls taken by the fund helped it in 2008 and early 2009, but resulted in lack of complete participation in the intervening rallies," says J. Venkatesan, its fund manager. Since March 2009, the fund has maintained an invested status of more than 90 per cent and this has aided participation in the rally. "The fund is predominantly a diversified large-cap fund, which generates index-plus returns without taking excessive risks. The fund has consistently outpaced the BSE 200 over a 12-year period," says Venkatesan.

Another fund that has been consistent is the Reliance Growth Fund, delivering a 30 per cent return in the past 10 years, about double that of the BSE Sensex. Being a predominantly mid-cap fund, it does not come with much risk and volatility. Even during the bloodbath of 2008, it only fell as much as the broad market; one would have expected a higher fall owing to its mid-cap exposure. Its higher allocation to cash (30 per cent) during the period also helped maintain its composure. The fund has not underperformed the average in the past five years.

The Reliance Vision Fund has also delivered an outstanding performance, but in the past one year, it has lagged behind the category average. The fund has had a tough time recouping from the downtrend and its conservative large-cap bend resulted in underperformance. Having said that, keep in mind that the fund is a large-cap with a proven record and remains a strong contender, says Rego.

Consistent funds: Selection procedure

• To identify funds that have performed consistently, we looked at all rated equity funds with a rating history of more than 5 years and those that have been in existence for over 10 years.
• This was followed by filtering out of funds that have managed a rating of three stars or more (Value Research star rating) on a month-on-month basis for a period of five years.
• A calculation was then carried out to determine the number of months for which the funds had obtained these ratings. The funds with the most number of such months were chosen.
• The final step involved choosing funds that had received the maximum number of stars through their rating history.
• Six of the top 10 consistent funds were in the Money Today-Value Research ranking of best mutual funds in 2007. This validates our ranking and Value Research's rating system.