Mutual fund schemes are selected by our rules-based methodology that takes into account the consistency of historical performance as well as some threshold criteria. We call this Index Based Investment Solutions (IBIS).
Our recommended portfolio is technically an index of mutual funds identified by a predefined set of rules. While the specific rules are confidential and proprietary to Scripbox, they, in essence, incorporate investing best practices as explained in detail below.
1. Define objectives: The right portfolio of equity funds aims to optimise long-term returns in the equity market, with lower volatility. The right portfolio of debt funds aims to optimise medium term returns in the debt market, with a risk that is almost comparable to FDs.
2. Filter-out unsuitable options: We start with the entire universe of 8,000+ mutual funds and focus on the growth options only, since they are best suited from a tax-efficiency perspective. We then eliminate all the funds that are relatively small and may have less flexibility in case of a sudden redemption pressure. We eliminate funds that don’t have a proven track record of at least 5 years since that’s necessary for your hard-earned money. A 5-year assessment is inline with global best practices. For equity funds, we select only diversified funds since specific themes and sectors require a subjective decision on the prospects of a sector. In our opinion, this is best left to experts managing diversified funds.
3. Analyse performance: We look at historical data and compare the performance of each mutual fund scheme to a benchmark – Nifty for Equity and Tax-Saving funds; FDs for Debt funds. We apply a complex proprietary formula that ranks and picks schemes that have consistently outperformed the relevant benchmark. The schemes that have outperformed the most and are consistent are ranked the highest. While not guaranteed, consistent performance can be expected to be repeated as it reflects a stable fund management process. It also indicates which funds better manage market risks (in case of equity) and interest rate risks (in case of debt).
4. Manage risk: We ensure diversification by limiting the number of funds from a single mutual fund company. In case of debt funds, we also consider credit risk. We analyse the securities in their portfolios over time and compute a credit score for each fund. Funds below a certain minimum score are eliminated.
5. Construct and manage the right portfolio: The portfolios of Equity, Debt and Tax-saving funds are algorithmically constructed based on performance risk criteria without any bias. The Scripbox selection algorithm is run periodically, to confirm that the funds selected are still suitable and whether better alternatives are available. This includes monitoring the credit risk of the debt funds portfolio. A set of rules ensures there is no unnecessary churn of portfolio. When a new fund is introduced, fresh investments would be in the new fund. Old holdings are monitored and gradually transitioned to new funds by the ‘Scripbox re-balancing algorithm’ for tax efficient re-balancing.