Although he may not get his fortune right, he is quite happy when he knows the precautions he needs to take for the day; with his job, with his family, his friends, and enemies too.

Many of you might have a somewhat similar inclination for Astrology.

The word 'Astrology’ is derived from two Greek words, ‘Astra’ which means ‘a star’, and ‘Logos’, which means a ‘logic or reason’. It signifies the movement of stars and planets that can have influence on your life.

Do Stars Talk?

Of course, tracking them helps us predict the future or fortune of an individual or entity.

But do they really stand true in case of mutual funds?

Can they really predict the fortune for mutual fund investors? Or would they just be a redundant symbol, going forward?

To meet the SEBI’s categorization and rationalization norms, mutual fund schemes are being re-categorized under different investment style, and many are being merged with other funds. In such a scenario, basing your investment decision on the past performance of the fund, which will now on be following different investment style altogether, is completely meaningless for you, the investor.

So would you rely on Star Ratings derived looking predominantly at such past performance numbers?

Say, for instance, you have invested in mutual funds for its 5-Star rating.

You were probably happy that you invested in a 5-star rated fund. This may even help you sleep peacefully at night.

Did you revisit the rating again? Has the fund, you had invested in, lost few of its stars?

What would you do in case it did?

You might simply stick with the fund you invested in, or else try to identify the next fund with a 5-star tag and switch to it.

Did you ever wonder, why your fund lost its stars? Was it sheer bad luck or did it never had potential to continue retaining the spot?

If you find that, except performance, all other factors of the fund still remains unchanged, i.e. its fund manager, its investment style, concentration, etc.; then, probably you might have got your timing wrong.

I will tell you why.

Even Best Mutual Funds Can Have Phases of Good and Bad Performance Cycle

Every mutual fund follows a particular investment style, based on its objective and pre-defined strategy. Each investment style has its own cycle. A top performing fund that made the best in a bull phase of its investment style may end up among the laggards, if the style enters the unfavourable phase.

You probably invested in the fund after it had already made the most of the cycle and generated returns for its investors, which helped it gain maximum stars. By the time you identified the fund, the style was about to enter its next phase, which resulted in a slowdown in its performance, thus losing the stars for the fund. So did your investments.

Don’t Fall For Passive Star Ratings to Predict Future Performers

Most mutual fund research entities follow the passive rating methodology, where they give very high weightage to quantitative factors like past performance and risk adjusted returns over a period of say 3 to 5 years and compare it with their peers to arrive at the best return generators in the lot.

In my understanding, these stars, derived from passive numbers at best, reflect how the fund has performed vis-à-vis its category peers over the last few years. Moreover, with the change in performance cycle, the ratings can change dynamically.

While looking at the past performance data of mutual funds is rational, what about the future growth potential and consistency of the fund?

What about the portfolio quality and investment style?

What about the portfolio maturity analysis, credit quality, and expenses that is significant while picking debt funds?

Where is the much-needed analysis about the fund managers skills and experience? And the investment systems and processes followed at the fund house, etc.?

These qualitative factors are more important than the historical performance, to judge the future growth potential and long-term consistency of the fund. Ignoring them completely, while arriving at the stars you probably use to select the funds for your portfolio, may never get you the real stars of tomorrow.

The interesting part is with the new classification and re-categorization of mutual fund schemes, these stars would be completely redundant and misleading if they are derived only on the basis of historical performance numbers.

What Has Changed For Mutual Fund Investors?

The age-old practice of using fancy names for mutual funds is almost redundant.

While some names were glorified, some were purely misleading. In terms of investment style, some schemes practiced completely different from their name or objective mandate.

To stop this practice and provide proper demarcation, in October 2017, the SEBI came up with its circular on “Categorization and Rationalization of Mutual Fund Schemes”.

In the circular, the regulator defined 36 categories for mutual funds to make investing simpler for mutual fund investors.

In the circular, the regulatory body directed all fund houses to relook at their scheme categorization and realign their schemes and underlying portfolios to these new categories.

Following this, mutual funds have started announcing scheme rationalisation and categorisation as per the SEBI circular.

While it thought that due to rationalisation norms, several duplicate and fancy schemes would be merged with others and wiped out; the mutual fund houses have managed to retain most of their schemes, by tweaking their objective and style to match the new categories defined by SEBI.

Some Strange Re-Categorization…

Here is the list of schemes that have decided to switch their investment style to a different category, and are about to begin a new journey.

Old Name	Old Category/Type	New Name	New Category/Type
ABSL Advantage Fund	Multicap	ABSL Equity Advantage Fund	Large & Midcap
ABSL Small & Midcap Fund	Small & Midcap	ABSL Small Cap Fund	Small cap
ABSL Top 100 Fund	Large cap	ABSL Focused Equity Fund	Focused
Canara Robeco Emerging Equities	Mid Cap Fund	Canara Robeco Emerging Equities Fund	Large & Mid Cap Fund
Canara Robeco Equity Tax Saver	Equity Linked Tax Saving Scheme	Canara Robeco Equity Tax Saver Fund	An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit
Canara Robeco F.O.R.C.E Fund (Financial Opportunities Retail Consumption & Entertainment)	Thematic	Canara Robeco Consumer Trends Fund	Consumption and Financial Theme
Canara Robeco Medium Term Opportunities Fund	Medium Term Income Fund	Canara Robeco Corporate Bond Fund	Corporate Bond Fund
Canara Robeco Savings Plus Fund	Short Term Income Fund	Canara Robeco Savings Fund	Low duration Fund
Canara Robeco Treasury Advantage Fund	Money Market Scheme	Canara Robeco Ultra Short Term Fund	Ultra-short duration Fund
Canara Robeco Yield Advantage Fund	Debt oriented hybrid scheme	Canara Robeco Short Duration Fund	Short duration Fund
DHFL Pramerica Inflation Indexed Bond Fund	Bond Fund	DHFL Pramerica Strategic Debt Fund	Medium to Long Duration Fund
DHFL Pramerica Premier Bond Fund	Long Term Income Fund	DHFL Pramerica Premier Bond Fund	Corporate Bond Fund
DSPBR Income Opportunities Fund	Income Fund	DSPBR Credit Risk Fund	Credit Risk Fund
DSPBR Micro Cap Fund	Micro cap Fund	DSPBR Small Cap Fund	Small cap Fund
HSBC India Opportunities Fund	Flexi cap Fund	HSBC Multi Cap Equity Fund	Muticap Fund
HSBC Midcap Equity Fund	Mid cap Fund	HSBC Small Cap Equity Fund	Small cap Fund
ICICI Prudential Corporate Bond Fund	Corporate Bond Fund	ICICI Prudential Medium Term Bond Fund	Medium Duration Fund
ICICI Prudential Income Opportunities Fund	Medium Term Income Fund	ICICI Prudential Bond Fund	Medium to Long Duration Fund
ICICI Prudential Indo Asia Equity Fund	Indo-Asia Equity Fund	ICICI Prudential Smallcap Fund	Small Cap Fund
ICICI Prudential Regular Savings Fund	Short Term Income Fund	ICICI Prudential Credit Risk Fund	Credit Risk Fund
ICICI Prudential Top 100 Fund	Large Cap Fund	ICICI Prudential Large & Mid Cap Fund	Large & Mid Cap Fund
ICICI Prudential Ultra Short Term Plan	Ultra Short Term Income Fund	ICICI Prudential Corporate Bond Fund	Corporate Bond Fund
Invesco India Active Income Fund	Long Term Income Fund	Invesco India Corporate Bond Fund	Corporate Bond Fund
Invesco India Corporate Bond Opportunities Fund	Corporate Bond Fund	Invesco India Credit Risk Fund	Credit Risk Fund
Invesco India Credit Opportunities Fund	Short Term Income Fund	Invesco India Money Market Fund	Money market Fund
Invesco India Growth Fund	Multicap Fund	Invesco India Growth Opportunities Fund	Large & Mid Cap Fund
Invesco India Medium Term Bond Fund	Medium Term Income Fund	Invesco India Ultra Short Term Fund	Ultra-short duration Fund
Invesco India Mid N Small Cap Fund	Midcap & Smallcap Fund	Invesco India Multicap Fund	Multicap Fund
L&T Emerging Businesses Fund	Mid & Smallcap	L&T Emerging Businesses Fund	Small Cap Fund
L&T Floating Rate Fund	Floating Rate Fund	L&T Money Market Fund	Money Market Fund
L&T Income Opportunities Fund	Income Fund	L&T Credit Risk Fund	Credit Risk Fund
L&T Resurgent India Corporate Bond Fund	Corporate Bond Fund	L&T Resurgent India Bond Fund	Medium Duration Fund
L&T Short Term Income Fund	Short Term Income Fund	L&T Low Duration Fund	Low Duration Fund
L&T Short Term Opportunities Fund	Short Term Income Fund	L&T Short Term Bond Fund	Short Duration Fund
Mirae Asset Emerging Bluechip Fund	Mid cap fund	Mirae Asset Emerging Bluechip Fund	Large & Mid Cap Fund
Parag Parikh Long Term Value Fund	Value	Parag Parikh Long Term Equity Fund	Multi Cap
Reliance Diversified Power Sector Fund	Power Sector Fund	Reliance Power & Infra Fund	Equity scheme investing in power & infrastructure sector
Reliance Media & Entertainment Fund	Media & Entertainment Sector Scheme	Reliance Consumption Fund	Equity scheme following consumption theme
Reliance NRI Equity Fund	Multi Cap Fund	Reliance Balanced Advantage Fund	Dynamic Asset Allocation Fund
Reliance Regular Savings Fund – Equity Option	Multi Cap Fund	Reliance Value Fund	Value Fund
Reliance Top 200 Fund	Large & Midcap Fund	Reliance Large Cap Fund	Large Cap Fund
SBI Corporate Bond Fund	Corporate Bond Fund	SBI Credit Risk Fund	Credit Risk Fund
SBI Emerging Businesses Fund	Mid and Small cap	SBI Focused Equity Fund	Focused Fund
SBI FMCG Fund	Sector	SBI Consumption Opportunities Fund	Thematic - Consumption
SBI IT Fund	Sector	SBI Technology Opportunities Fund	Sector
SBI Magnum Equity Fund	Large cap	SBI Magnum Equity ESG Fund	Thematic - ESG
SBI Magnum Gilt Fund - Short Term Plan	Short Term Gilt Fund	SBI Magnum Constant Maturity Fund	Gilt Fund with 10-year constant duration
SBI Magnum Global Fund	Midcap	SBI Magnum Global Fund	Thematic - MNC
SBI Magnum Monthly Income Plan	Monthly Income Plan	SBI Debt Hybrid Fund	Conservative hybrid
SBI Magnum Monthly Income Plan - Floater	Monthly Income Plan	SBI Multi Asset Allocation Fund	Multi-asset allocation
SBI Magnum Multiplier Fund	Multicap	SBI Large & Midcap Fund	Large & Mid Cap Fund
SBI Pharma Fund	Sector	SBI Healthcare Opportunities Fund	Sector
SBI Savings Fund	Floating Rate Fund	SBI Savings Fund	Money market Fund
SBI Small & Midcap Fund	Small and Midcap	SBI Small Cap Fund	Small cap Fund
SBI Treasury Advantage Fund	Short Term Income Fund	SBI Banking and PSU Fund	Banking and PSU Fund
Sundaram Equity Multiplier	Multicap Fund	Sundaram Large and Mid Cap Fund	Large & Mid Cap Fund -
Sundaram Flexible Fund - Flexible Income Plan	Floating Rate Fund	Sundaram Corporate Bond Fund	Corporate Bond Fund
Sundaram Income Plus	Income Fund	Sundaram Short Term Credit Risk Fund	Credit Risk Fund
Tata Long Term Debt Fund	Long Term Income Fund	Tata Income Fund	Medium to Long Duration Fund
Union Small and Midcap Fund	Small and Midcap Fund	Union Small Cap Fund	Small Cap Fund
UTI Equity Fund	Large cap fund	UTI Equity Fund	Multi Cap Fund
UTI Floating Rate Fund	Floating Rate Fund	UTI Ultra Short Term Fund	Ultra-short duration Fund
UTI G-Sec Fund	Gilt Fund	UTI Overnight Fund	Overnight Fund
UTI Income Opportunities Fund	Short Term Income Fund	UTI Credit Risk Fund	Credit Risk Fund
UTI Opportunities Fund	Opportunities Style Fund	UTI Opportunities Fund	Value Fund
UTI Top 100 Fund	Large Cap Fund	UTI Top 100 Fund	Large & Mid Cap Fund
UTI Treasury Advantage Fund	Ultra-short term debt Fund	UTI Treasury Advantage Fund	Low duration Fund

Source: PersonalFN Research

As you can see, many equity as well as debt schemes are expected to change their investment style and move to a completely new category. Their previous performance track record would not hold true for their newly adopted style. Moreover, there are some strange re-categorization that are done to keep schemes alive.

Some fund houses, like SBI, have gone a step ahead to adopt a new theme altogether. Creating a new ESG (Environment, Social and Governance) and changing the style of its large-cap oriented fund ‘SBI Magnum Equity Fund’, to a thematic fund, is something that was least expected.

Similarly, SBI Global Fund, which was a mid-cap fund focused on picking quality mid cap stocks, will focus on MNC stocks now onwards.

It seems, the fund house found it more convenient in changing the style and category instead of its name. You as an investor would definitely not stick to the funds that do not meet your objective.

In my opinion, mutual fund houses could have been more responsible in ensuring that investors do not face much hassle and their objective of investing in the scheme does not show much deviation. However, sticking to the schemes without re-evaluating the suitability of the new style to your investment goals can be risky for you.

It’s Time To Look Beyond Stars And Performance…

So like we’ve established, with these changes, picking schemes based on ratings derived from their historical performance can be misleading.

These funds will need at least another 2-3 years to develop a credible track record which can be used to rate them.

Until then, they can be decided on their features, portfolio characteristics, and management quality. It is the time to give more weightage to fund and fund house quality and consistency over historical returns.

At PersonalFN, while analyzing funds, we give weightage to both quantitative as well as qualitative parameters.

Here is the list of checks we do under our Quantitative and Qualitative Parameters…

→ Quantitative Parameters

Testing on Performance Parameters and Risk Analysis

- This is to analyse, if the fund has shown consistency in performance across various points and provides decent risk adjusted returns. Under this, each fund is tested and scored on various quantitative parameters like 1 Year Rolling Returns, 3 Year Rolling CAGR, 5 Year Y-o-Y Rolling Average Returns, and also on risk reward ratios like Sharpe Ratio, Sortino Ratio and Standard Deviation.

Testing on Consistency across market cycles

- This parameter is to ensure that the fund has the ability to perform consistently across market cycles. Here we compare schemes performance vis-à-vis their benchmark index across bullish and bearish market phases and accordingly score on its performance consistency and number of cycles survived. Underperformers will score low.

→ Qualitative Parameters

Testing Portfolio Quality

- We believe, scheme should not hold highly concentrated portfolio. Therefore, we score schemes on portfolio characteristics like concentration of top 5 and top 10 holdings.

- To ensure that balanced funds do not hold low or unrated debt instruments, we also consider credit quality rating score of debt portion of the portfolio held by balanced funds

- Engaging in high churning can result in trading and high turnover cost. Therefore, in our process, we also score schemes on portfolio characteristics like portfolio turnover ratio and expenses, and penalise funds involved in high churning.

Testing on Quality of Fund Management

Apart from schemes, we also test the fund manager and consistency of the fund house. Here we check if…

- The fund manager is over loaded with large no of schemes.We score on parameters like fund manager to scheme ratio, i.e. no of schemes managed by a single fund manager. We believe a single fund manager should not manage more than 5 funds. If the number of funds managed by a single fund manager exceeds 5, we consider him overburdened.

- The fund manager has decent work experience. We score on the average work experience of all the fund managers in the fund house, to ensure the investors’ money is in experienced hands.

- The fund house is not active in only raising AUM. For many years, in our process, we consider the duplicate schemes launched by the fund house and accordingly penalise the fund house if they have many duplicate schemes. Multiple schemes with same objective means low score for the fund house.

- Efficiency of the fund house in managing your money : We calculate the efficiency of the fund house by checking and scoring on the percentage of AUM performance, which helps us understand what proportion of the total AUM of the fund house is performing and what proportion is underperforming. It helps judge the efficiency of the fund house in managing the garnered corpus.

In our process, adequate weightage is given to each of the parameters mentioned above and the funds are scored on each of them. Based on the composite score, PersonalFN arrives at views on each fund recommend under various mutual fund research services.

You see, the process we follow at PersonalFN is much more comprehensive in nature. We do not rely only upon quantitative parameters that is passive in nature. The qualitative parameters we use, helps us project the long-term consistency and stability that can be expected from quality portfolio and fund management.

While we may not aim for top performers, what we look for is quality funds that can be consistent performers in the long run.

So the next time you look at Star ratings that are derived merely on the basis of performance numbers, it will be best to consider this criteria as a measure of the funds historical performance and not a measure of top-rated future performance.

P.S.: Did you ever try PersonalFN’s premium research service ‘FundSelect’? If not, it’s good time to do so. We are now offering OVER 50 PERCENT DISCOUNT on fresh subscriptions to FundSelect. So, instead of the regular price of Rs 5,000, you will pay Rs 2,450 only for the first year of subscription. And if you subscribe now, you will also get Free access to our premium report, ‘The Super Investment Portfolio’. Read on for full details...

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DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014  

About the Company including business activity 

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989. 

QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services. 

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, it subsidiaries and its Directors. 

and condition on which its offer research report. For the terms and condition for research report click here.

Details of associates

1. Money Simplified Services Private Limited;
2. PersonalFN Insurance Services India Private Limited;
3. Equitymaster Agora Research Private Limited;
4. Common Sense Living Private Limited;
5. Quantum Advisors Private Limited;
6. Quantum Asset Management Company Private Limited;
7. HelpYourNGO Private Limited;
8. HelpYourNGO Foundation;
9. Natural Streets for Performing Arts Foundation;
10. Primary Real Estate Advisors Private Limited;
11. Rahul Goel;
12. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest

1. Neither QIS, it’s Associates, Research Analyst or his/her relative have any financial interest in the subject Company , except QIS receives fees for providing research to Quantum Equity Fund of Fund (QEFoF) which is Fund of Fund scheme managed by QMF.
2. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
3. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront /annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices

Disclosure with regard to receipt of Compensation
 

1. Neither QIS nor it's Associates have any compensation from the subject Company in the past twelve months.
2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company in the past twelve months.
3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company in the past twelve months.
4. Neither QIS nor it’s Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months except from Axis Bank Limited under a service agreement.
5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report

General disclosure
 

1. The Research Analyst has not served as an officer, director or employee of the subject Company.
2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.

Subject Company means Mutual Fund Schemes

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021 Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021. Email: info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222

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