To ensure that our selection of funds is completely un-biased and driven only by the performance of the funds (which means that you get the best), we developed a scientific rule-based method.
How do we select funds
Our selection method applies the well-established Indexing approach to mutual funds and is called IBIS (Index Based Investment Solutions). Our portfolio is technically an Index of mutual funds identified by a pre-defined set of rules. While the specific rules are confidential and proprietary to scripbox, they, in essence, incorporate investing best practices as explained below.
We take the entire set of 1800+ mutual fund schemes and begin by filtering out funds that do not meet certain basic criteria.
- Funds with a minimum 4 year track record;
- Of a reasonable size viz. more than Rs 250 Cr in assets;
- Only Diversified Equity Funds and specifically exclude thematic and sector funds as these require a subjective decision on the prospects of a sector;
- Exclude gold funds, Index Funds and International funds.
- Only growth plans.
- We look at data for the past 4 years and compare the performance of each scheme to the Nifty.
- We apply a complex proprietary formula that ranks and picks schemes that have consistently outperformed the market. The schemes that have outperformed the most and done it most of the time are ranked the highest.
- There are additional rules to ensure diversification e.g. we do not have more than 2 schemes from a single mutual fund.
- The rules also ensure that the review process does not lead to unnecessary churn.
We are now left with 200+ schemes.
We then start the task of picking our basket based on performance:
Why 4 funds?
Our analysis led us to select 4 funds for the portfolio. Adding more funds does not provide significant incremental benefit of diversification. It’s also a reasonable number of funds to manage.
For 2014, our portfolio consists of:
- UTI Equity Fund (G)
- ICICI Prudential Top 100 Fund (G)
- Canara Robeco Equity Diversified Fund (G)
- ICICI Prudential Focused Bluechip Equity Fund (G)
You may not be familiar with some of the terms used above. Here’s what they mean
Diversified Portfolio: A portfolio of investments that reduces risk and volatility by investing in different investments.
Diversified Equity Funds: Mutual funds that invest in a wide range of stocks.
Sector Funds: Mutual funds that invest in stocks in a specific sector.
Thematic Funds: Mutual funds that invest with a ‘theme’. For example: companies with high dividend yields.
International Funds: Mutual funds that invest in stocks of international companies or in other funds, which invest in overseas markets.
Benchmark: A reference for evaluating the performance of a fund. This is specified in the objective of a fund. The most commonly used benchmarks for equity funds in India are the NSE S&P Nifty and the BSE Sensex.
Index Funds: Mutual funds that invest in stocks that are constituents of a market Index. For Example, the Goldman Sachs Nifty BeES invests in stocks that comprise the NSE S&P Nifty
Assets Under Management (AUM): This is the market value of all assets (Stocks, Cash, debt) held by a mutual fund scheme. Also referred to as the ‘size’ of the fund.