Mutual Fund Analysis India

Mutual Fund Analysis (India)

Indian fund selection is dominated by two errors: judging a scheme on trailing one- and three-year returns, and ignoring the expense drag compounded over a holding period. This skill fixes both.

Step 1 — Establish the category and the mandate

SEBI's scheme categorisation binds each fund to a defined mandate. A fund cannot be compared to a fund in another category.

Equity categories (one scheme per category per AMC): Large Cap, Large & Mid Cap, Mid Cap, Small Cap, Multi Cap, Flexi Cap, Dividend Yield, Value, Contra, Focused, Sectoral/Thematic, ELSS.

Market-cap definitions come from AMFI, which publishes the list of stocks by full market capitalisation every six months:

Minimum allocations that matter:

• Large Cap: at least 80% in large caps
• Mid Cap: at least 65% in mid caps
• Small Cap: at least 65% in small caps
• Multi Cap: at least 25% each in large, mid and small — a hard constraint that forces small-cap exposure in every market
• Flexi Cap: at least 65% in equity, no market-cap constraint — the manager chooses
• Focused: maximum 30 stocks
• ELSS: 3-year lock-in per unit, at least 80% equity

Multi Cap and Flexi Cap are not synonyms. Multi Cap is mandated into small caps; Flexi Cap can sit entirely in large caps. Users conflate them constantly.

Debt categories run from Overnight and Liquid through Ultra Short, Low Duration, Money Market, Short, Medium, Medium-to-Long, Long Duration, Dynamic Bond, Corporate Bond, Credit Risk, Banking & PSU, Gilt, Gilt with 10-year constant duration, and Floater. The category names describe duration and credit mandate — read them literally.

SEBI has been consulting on and amending the categorisation framework periodically. Verify the current category definitions against the SEBI master circular on mutual funds before relying on a specific limit.

Step 2 — Rolling returns, never point-to-point

Trailing returns are an artefact of the start and end dates. A fund that looks brilliant on 5-year trailing returns may simply have a favourable start point.

Compute rolling returns: every possible 3-year (and 5-year) period in the fund's history, rolled daily or monthly.

Report:

• Median rolling return
• 25th and 75th percentile
• % of periods the fund beat its benchmark
• % of periods the fund beat its category median
• Worst rolling period

Consistency beats peak performance. A fund beating its benchmark in 80% of rolling 3-year periods is a better proposition than one with a higher trailing return driven by two exceptional quarters.

Always name the benchmark — SEBI requires a Tier-1 benchmark per category, and Total Return Index (TRI) benchmarking is mandatory, so any comparison against a price index is stale and flattering.

Step 3 — Cost

Return drag = TER, charged daily on NAV
Direct plan TER  = Regular plan TER − distributor commission
Typical gap: 0.5%–1.2% per year for equity schemes

Compound it. A 1% annual gap over 20 years on a ₹10,000 monthly SIP is a very large number — compute it explicitly for the user rather than describing it as "a bit lower".

• TER is capped by SEBI on a slab basis that declines as scheme AUM rises. A large scheme should have a lower TER; check whether it does.
• Direct plans are bought from the AMC or an execution-only platform. Regular plans pay a distributor. If the user is choosing funds themselves, they are paying for advice they are not receiving.
• Exit load: typically 1% within 12 months for equity schemes; nil for most liquid and overnight funds after the graded 7-day schedule. Check the scheme information document.
• Passive alternatives: for large-cap exposure especially, compare against a Nifty 50 or Nifty 100 index fund's TER. The active large-cap category's aggregate record against the TRI benchmark is the relevant comparison, not a single fund's brochure.

Step 4 — Portfolio quality

Pull the monthly portfolio disclosure (mandatory, published by every AMC and aggregated by AMFI):

• Concentration: top-10 holdings as a % of the portfolio; number of stocks
• Market-cap split versus the mandate — is a "large cap" fund quietly running 18% mid caps for extra return?
• Sector concentration versus benchmark
• Cash levels — persistent high cash is an implicit market call the investor did not ask for
• Portfolio turnover — high turnover means transaction costs not captured in the TER
• Overlap between schemes. Compute the common-holding percentage between any two funds the user holds. Two "diversified" large-cap funds frequently overlap 60–80%; the user owns one fund and pays for two.

Overlap % = Σ min(weight_A(stock), weight_B(stock)) across all stocks

Step 5 — Debt funds: read credit and duration separately

Two risks, always separated:

Duration risk — sensitivity to rate moves.

Approximate price change ≈ − Modified duration × Δ yield

A gilt fund with 7-year duration loses roughly 7% for a 100bp rise in yields. With the RBI repo rate at 5.25% as at the August 2026 policy, the direction of the cycle matters to which duration bucket is appropriate — confirm the current stance before advising.

Credit risk — the rating profile. Read the portfolio's AAA / AA / A and below split. A Credit Risk fund is mandated to hold at least 65% in AA and below. That is the product working as designed, not a defect — but the user must know they are being paid for taking credit risk.

Also check the Potential Risk Class (PRC) matrix in the scheme document, which SEBI requires: it maps the scheme's maximum permitted credit risk and interest rate risk into a 3×3 cell. It is the most honest single disclosure a debt fund makes.

Never describe a debt fund as "safe". Indian debt funds have gated, side-pocketed and written down before.

Step 6 — SIP versus lumpsum

Answer with mechanics, not slogans.

• A SIP is rupee-cost averaging, which reduces sequence risk and enforces discipline. Over long horizons in a rising market it will usually underperform a lumpsum invested at the start, because the average deployment date is later. Both facts are true; state both.
• SIP XIRR is the correct return measure for a SIP, not the fund's trailing return. Compute XIRR from the actual cash flows.
• Step-up SIPs materially change outcomes; model them if the user has an income growth expectation.
• For a lumpsum in equity, an STP from a liquid fund over 3–6 months is the usual compromise. Say what it costs (the equity return foregone if markets rise) rather than presenting it as free risk reduction.

Step 7 — The things that actually predict future performance

In order of evidence:

1. Cost. The most reliable single predictor available.
2. Category and mandate fit with the investor's need.
3. Consistency of rolling relative performance, not its level.
4. Fund house process and stability — manager tenure, AMC-level risk framework, whether performance survives a manager change.
5. Scheme size relative to strategy. A small-cap fund with very large AUM cannot own its stated universe without moving prices; it drifts toward mid caps. Check AUM against the liquidity of the mandate.

Star ratings and past-year rankings predict very little. Say so when the user cites them.

Output format

# <Scheme> — Review

**Category:** <SEBI category> | **Benchmark:** <Tier-1 TRI> | **AUM:** ₹X cr | **TER:** direct x.xx% / regular y.yy%

## Rolling returns (3y, since inception)
| | Fund | Benchmark TRI | Category median |
| Median | | | |
| 25th pct | | | |
| Worst | | | |
| % periods > benchmark | | | |

## Portfolio
- Stocks: N | Top 10: X% | Cash: Y%
- Cap split: L / M / S = ...
- Mandate compliance: ...

## Cost impact
Over <horizon>, the direct/regular gap of x.xx% costs approximately ₹Z on the stated investment.

## Overlap with the user's other funds
| Fund A | Fund B | Overlap % |

## Assessment
<Does the scheme do what its category says, consistently, at a defensible cost, and does the user need it alongside what they already own?>

Hard rules

• Never recommend a specific scheme as "the best fund". Explain what a scheme is, how it has behaved, what it costs, and what it would take for it to suit the user's stated objective.
• Always state the benchmark and that it is TRI.
• Always show the direct-plan TER alongside regular, and the compounded cost difference in rupees.
• Past performance does not predict future returns. Include that, once, plainly.
• This is information, not investment advice. Direct the user to a SEBI-registered investment adviser for a recommendation.