Every April, Outlook Money ranks mutual fund (MF) schemes and assigns them star-ratings in the Best Funds issue. This is essentially a report card of schemes to show how they have performed over a period of time. All schemes except ones that stipulate minimum investment of more than Rs 50,000 are considered. But how do you use these ratings? While it is based on past performance, that, by itself, is no guarantee of future success. What you need is a tool that will take the MF rankings and star-ratings forward in a way that gives you an idea of a scheme’s future. Enter OLM 50.

Designed and presented for the first time as Introducing the OLM 50 in our issue of 10-23 April 2008, OLM 50 then had kept the 2007 MF rankings and star-ratings as a base. It gave a concise list of 50 schemes that you should pick and choose from for fresh investments. To ensure that you have a good start, we shortlisted all the five- and four-star-rated schemes—82 in all.

Then, we went beyond mere numbers and took a subjective call. We sifted through all these schemes and picked our favourite 50. Thirty-six five- and four-star-rated schemes did not find a mention in OLM 50. This is because of the presence of better alternatives.

On the other hand, OLM 50 also included four schemes that did not make it to our rankings on account of lack of history, but which we thought were emerging stars.

The all-new OLM 50
It’s now time to present to you the second edition of OLM 50. And although we recently ranked and star-rated all MF schemes (for the period ending June 2008), our subsequent editions of OLM 50, starting from now, will take more cues from the previous editions of the shortlists (our first edition, in this case) as against the MF rankings and star-ratings. Why? Because portfolios should not be churned so often. Because consecutive scheme rankings and star-ratings could throw up a vastly different set of five- and four-star-rated schemes (our base for OLM 50’s original edition), more so if markets take a dramatic U-turn as they have done in 2008. So, a new set of ‘performers’ will replace the original set of schemes swiftly.

How To Use OLM 50
This is your one-stop guide for fresh investments. Although there are 50 schemes in this portfolio, you need not invest in all of them. Just pick up around six to eight schemes, across categories, depending on your risk profile. So, if you don’t mind taking risks for higher returns, choose more from the equity platter but if you’re risk averse, pick up generously from the debt platter.

The list does not include liquid schemes because they are not a permanent part of your asset allocation. You don’t invest in liquid funds; you merely park your excess cash there till you find a more suitable and permanent home for it.

Unless we find a pressing reason to replace any existing OLM 50 scheme, we do not churn the portfolio. If you own a scheme that is not in OLM 50, it doesn’t mean you should exit. OLM 50 is meant more for fresh investments. It doesn’t mean all other schemes are bad and merit a sell. Through our regular MF coverage throughout the year, we will keep updating you of any investments that merit a sell, as also buy opportunities.

However, if your scheme is not a part of OLM 50 and also a consistent underperformer, an exit is warranted.

The Changes
Here’s why some schemes exited or entered the list or moved up or down within the OLM 50.

Reliance MF. Reliance RSF-Equity (RRE) is the only addition in this category. This is one of the rising stars from the Reliance fund family and its best performing in the diversified category. Remember, the fund house’s hugely successful scheme Reliance Vision is large-cap-oriented and Reliance Growth is mid-cap oriented; its absence so far from the equity-diversified category had been conspicuous. Until now, of course. RRE topped the charts in this category; it is a diversified equity scheme and its small corpus size makes it more agile. 

Deutsche MF. Watch out for the two rising stars from Deutsche MF—DWS Alpha Equity and DWS Opportunities Fund. Both did very well and earned five stars each. If continued to be managed well, their small sizes will be an added advantage. They are not yet a part of OLM 50 shortlist because we need more consistency in their top-quartile performance; they have so far enjoyed a meteoric rise.

DSP ML MF. Although DSP Merrill Lynch Opportunities Fund lost a star, we still feel confident of the scheme’s long-term prospects.

SBI MF. Both of SBI MF’s schemes that were earlier present in the OLM 50—SBI Magnum Contra (SMC) and SBI Magnum Equity—have slipped multiple places and lost a star, each. Between 2004 and 2006, when SMC’s corpus grew by Rs 1,408.34 crore, it returned a big 62 per cent. But ever since the scheme swelled, its performance has tapered. Although a four-star rating is still top quartile material, we think its decline has only started.

Special Mention

A look at some schemes that are out of the ordinary.

Make it large. Since the current market conditions are more conducive for large-cap funds and since they are the first ones that would appreciate when equity markets start to recover, we give you two more good schemes, Benchmark Nifty BeES (BNB) and IDFC Imperial Equity Fund, in this space. Low cost, lowest tracking error and no fund manager risk are some of the reasons why BNB merits a mention.

In the middle path. Despite Reliance Growth’s stupendous success so far, it’s time to pick alternatives for fresh mid-cap MF investments. A fat mid-cap fund also becomes a drag when it loses its agility. On the other hand, a nimble-footed mid-cap fund can enter and exit mid-cap scrips with ease as such scrips suffer from low liquidity. Also, too many scrips makes it difficult for the fund to enjoy the success even if few of its scrips enjoy good appreciation.

Passive observers. Benchmark Junior BeES merits a mention in OLM 50. The exchange-traded fund (ETF) passively tracks Nifty Junior index and is an option if you want to avoid fund manager risk.

Tax savers. If you want to save taxes in the interim, we suggest you consider Franklin India Index Tax Fund (FIITF), India’s only passively-managed, equity-linked savings scheme. No fund manager risk, cheap market levels, Section 80C tax benefits and a minimum three-year time horizon (all ELSS schemes impose a three-year lock-in) make this scheme a winner.

All that shine. In sectoral schemes, we have added a gold ETF and DSP Merrill Lynch World Gold Fund (DMWGF). DMWGF is a fund-of-funds that invests its entire corpus in Merrill Lynch World Gold Fund that in turn invests in equity shares of international gold mining companies. Unlike a gold ETF, this is an active way of tracking gold prices. Take your pick depending on your risk profile.

Women only. Despite UTI Mahila Unit Scheme (UMUS) topping the charts yet again and being a five-star rated one, it goes out of OLM 50 only because of its narrow mandate—the scheme is open only to women investors, contrary to the impression that the MF gave us earlier that all sexes would soon be allowed to invest in UMUS, the scheme still allows only women investors. Hence, its exclusion.;

kayezad@outlookindia.com