There are essentially two ways of classifying mutual funds. One is based on the amount of money invested by the funds, and the other on what need they fulfill for the investor. An example of the former is 'Equity: Large & Mid-cap', while one from latter is 'Growth'. The BT-Value Research approach is the latter. To make things simpler, niche fund categories such as sector and thematic funds have been kept out.
Equity: Aggressive Growth includes multi-cap, mid- and small-cap funds. Diversified equity funds with an average allocation of 40-60 per cent of their assets to large cap stocks have been classified as multi cap funds. Those with an average allocation of less than 40 per cent to large-cap stocks were classified as mid- and small-cap funds.
Equity: Long Term Growth includes all largecap and large- and mid-cap funds. Diversified equity funds with an average allocation of 60 to 80 per cent of their assets to large-cap stocks have been classified as large and mid-cap funds. And those with an average allocation of more than 80 per cent to large-cap stocks were classified as large-cap funds.
Equity: Conservative Growth includes all balanced funds, that is, funds with an average equity exposure of more than 60 per cent.
Debt: Bond includes medium and long-term bond funds. All the income and gilt funds as per their stated objectives were considered in this category.
Debt: Liquid includes liquid and ultra short-term funds.
The Value Research rating summarises how a fund has performed over the three years to March 2013, relative to the other funds in its category, for the risks it has taken. Funds that are less than three years old have been dropped. As have funds with less than Rs 100 crore of average assets under management, or AAUM, in the past six months.
The rating is determined by subtracting the fund's risk score from its return score. To calculate 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. Risk-free return is defined as State Bank of India's 45-180 days term deposit rate. For all months/weeks the fund has underperformed the risk-free return, the magnitude of underperformance is added. This helps arrive at the average underperformance and how the fund has performed vis-a-vis its category average. The relative performance of the fund is expressed as a risk score.
For returns scores, funds' monthly/weekly returns - adjusted for dividend, bonus or rights - are compared with the monthly/weekly risk-free return to arrive at the fund's total return in excess of the risk-free return. The monthly average risk-adjusted return is compared with the average category return to arrive at the returns score. The overall scores - arrived at after deducting the risk score from the returns score - have been multiplied by 100 to make them more readable.
For Best Fund House, Best Equity Fund Manager, and Best Debt Fund Manager, only mainstream funds were considered. The exercise was based on the quarterly performance over the past five years (20 quarters). Each quarterly performance of a fund was assigned a quartile rank. So, funds and fund managers who have been around less than five years were eliminated.
The fund house with maximum top quartile performances was adjudged the best. Fund companies with less than Rs 5,000 crore AAUM were not considered. For best fund manager - equity and debt - the manager with relatively highest top quartile performances were adjudged the best. This was irrespective of job change - if a fund manager moved from one fund to another, he was attributed the fund performance for his term across fund houses. Managers with less than Rs 100 crore under management were excluded.