Indian Stocks: Consistent performers are the best bets

Instead of relying on past results over a single time scale, one should go for funds that give good results across different periods. ET Wealth helps you track down some such funds across four categories

 One of the easiest ways to pick a good mutual fund is to evaluate a fund's historical returns, which helps identify and choose top performers. However, given that different funds do well in different time frames, which period should investors consider? Take Birla Sun Life Dividend Yield Plus, which has featured in the top 10 funds across all equity schemes in the past five years, but does not figure even in the top 40 equity schemes in the past year. Similarly, DSPBR Microcap fund has been in the top five equity funds in the past three years, but doesn't appear in the past year's listing. 

    This implies that relying on the analysis of historical returns over a single time scale may not be very rewarding. To overcome this limitation, one should analyse the results over multiple time scales. In other words, the funds that are consistent in generating returns should be given weightage. This is because such funds aim for returns that beat the market and entail superior and advanced fund management skills. Picking a fund that is consistent not only saves investors the cost of portfolio churning, but also reduces the need for regular fund monitoring and portfolio rebalancing. It is advisable to invest in mutual funds, especially equity funds, for medium to long term, and if one regularly rebalances the holdings in the short term, the entire purpose of resorting to mutual funds is defeated. According to Jayant R Pai, head, marketing, PPFAS Asset Management Private Limited, "Investors have an impulsive urge to opt for the mid-cap or micro-cap fund that is the flavour of the month. One should not allocate more than 5% of the portfolio to such funds." 

    Besides, investing in consistent funds is a good option if one needs the money in the short to medium term. This is because such funds strive to invest in securities that minimise the impact of market volatility. On the other hand, a fund that is erratic in its performance exhibits high volatility, which increases the chances of losing money. 

    The consistency of a fund's performance can be measured in terms of its performance with respect to its benchmark and category average. A fund can deliver negative returns when the markets are in a bearish mode, but the funds that fall less than their benchmarks or category averages are genuine outperformers. Similarly, in a bull market, the outperformers are those that gain more than their benchmarks and category averages. 

    To help you zero in on funds that have shown consistency in their performance in different time scales, ET Wealth tracks these across various categories. We considered all equity funds, balanced equity funds, balanced debt funds and income funds. The consistency is evaluated on five time scales. Equity and balanced equity funds are evaluated over six months, 1 year, 2 years, 3 years and 5 years. Balanced debt funds and income funds are evaluated over 3 months, 6 months, 1 year, 2 years and 3 years. Besides, only regular schemes with growth options are considered for the analysis. For a fund to be consistent, it has to outperform its benchmark and category average in all the five time scales. If it fails to outperform even on one time scale, it will not make it to the consistency list. 

    In the case of equity funds, nearly 336 schemes were analysed. We found 32 equity funds that satisfied the criteria of benchmark and category average in all the five time scales. However, we are listing out funds whose latest available corpus is more than 1,000 crore (see table). 

    In the balanced equity category, 30 funds were analysed and only three funds satisfied the criteria. Similarly, 30 balanced debt funds were analysed and only two funds fulfilled the criteria. In the case of income funds, 80 funds were analysed and only five were consistent in their performance. 

    The shortlisted funds across these categories are true outperformers as one would have benefited from investing in them in any of the time periods mentioned. It is possible that a consistent fund may or may not be a top performing fund in any one time scale, but will surely prove more prosperous in the long run.