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MUST HAVE: Top 5 mutual funds for your portfolio

Last updated on: September 17, 2012 18:45 IST

MUST HAVE: Top 5 mutual funds for your portfolio

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Morningstar.in

These funds have scored the best on the Morningstar risk and return rating grades

Along with assigning the Morningstar rating for mutual funds, which is a visual summary of a fund's risk-adjusted returns compared to peers, we also assign individual risk and return ratings for each fund that gets a Morningstar rating, on a scale of five: Low, Below-Average, Average, Above-Average and High.

The Morningstar risk rating is assessment of the variations in a fund's returns in comparison to similar funds, with an emphasis on downward variation -- if two funds have the exact same return, the one with greater variations in its return is given the larger risk score.

The Morningstar return rating is an assessment of the fund's excess return over a risk-free rate in comparison to similar funds, with an emphasis on downward variation -- if two funds have precisely the same excess return over a risk-free rate, the one with lower variations in its return is given the higher return score.

Morningstar assigns risk and return ratings for funds over three time periods: three, five and 10 years and an overall risk rating is produced after weighing an averaging the three measures (funds in existence for less than three years are not rated). The ratings are assigned on a bell-curve basis: the top 10 per cent of funds on each measure get its highest rating, followed by 22.5 per cent, 35 per cent, 22.5 per cent and the bottom 10 per cent.

The Morningstar rating, commonly known as the star rating, is a measure of a fund's risk-adjusted return -- after excluding costs and loads -- and is calculated in a similar way mentioned above. Thus, the higher a fund's risk, the higher its returns will have to be to achieve a high star rating.

We looked for funds that have scored the best on both risk and return measures -- low risk and high return ratings overall (as of August) -- and the search produced a total of five funds within the equity and allocation funds categories. Not surprisingly, each of those five funds gets a Morningstar rating of five stars.

Here's a look at the five funds that cleared the bar. We also look at the funds' performances and strategy over the past three years.

Courtesy 


Photographs: Rediff Archives

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Canara Robeco Equity Taxsaver

Three-year return: 12.15 per cent

With a three-year return of 12.15 per cent, the tax-saving fund, which was launched in February 2009, beat its benchmark, BSE 100 (3.31 per cent) and the ELSS category average (6.62 per cent) comfortably. It did so by betting big on consumer cyclical stocks and under weighing sensitive sectors such as energy and industrials.

As the bounce-back rally picked up steam from 2009 onward till late 2010, the fund used it lighten up on mid- and small-cap stocks, a move that helped it weather the down market of 2011 better than others. It reflects in the fund's low three-year downside-capture ratio of 71.44.

Over a three-year period, the fund clocks a staggering alpha of 7.43, compared to 2.81 for its category.

On the qualitative front, though, the fund has seen a lot of management churn, with three different managers in three years, and with media reports speculating incumbent manager Soumendra Nath Lahiri having resigned as well.


Image: Canara Robeco Equity Taxsaver
Photographs: Rediff Money

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UTI India Lifestyle

Three-year return: 11.72 per cent

The fund has built up an impressive track record even though its character has undergone a distinctive change over the years.

While earlier the manager used to take a lot of cash calls (at one point in 2008, the fund held about 35 per cent of assets in cash, a move that hurt it in the early 2009 rebound), the fund curtailed that trait later on and still delivered a market-beating performance of -13.93 per cent in 2011, while its primary benchmark lost over 27 per cent.


Image: UTI India Lifestyle
Photographs: Rediff Money

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UTI Wealth Builder Series II

Three-year return: 11.53 per cent

The large-cap, which also looks to invest up to 35 per cent of its assets in gold, was helped in no small measure by that factor as it kept increasing its exposure while the yellow metal continued on its staggering rise -- in fact, in 2011, the fund's gold exposure helped it post only a 7.71 per cent loss while the broader market fell about 25 per cent.

That gold exposure also helped the fund recover from a mistimed cash call in 2009 as the markets turned around.


Image: UTI Wealth Builder Series II
Photographs: Rediff Money
Tags: UTI

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UTI Equity Fund

Three-year return: 11.18 per cent

Another fund from the UTI stable, UTI Equity has appeared in the top quartile in each of the years since 2008, thanks to manager Anoop Bhaskar's deft stock picking.

Bhaskar spotted value in consumer stocks early on and over the three-year period, on average, the fund was overweight on consumer defensives (13.2 per cent versus 8.2 per cent for the benchmark), consumer cyclicals (14.4 per cent vs 8 per cent) and healthcare (8.9 per cent vs 4.3 per cent) while being underweight financial services, basic materials and industrials.


Image: UTI Equity Fund
Photographs: Rediff Money

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HDFC Multiple Yield 2005

Three-year return: 10.40 per cent

The conservative-allocation fund seeks to invest in debt and liquid instruments while reserving a small portion to stocks. HDFC Multiple Yield 2005 has landed in the top quartile of its category in each of the past three years.

The fund's equity sleeve was also boosted by some prudent stock selection with bets on mid-cap stocks such as VST Industries and TTK Prestige paying off handsomely.


Image: HDFC Multiple Yield 2005
Photographs: Rediff Money

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