Mutual funds are a great way to create wealth. But you should know how to select the right mutual fund. For example, the best performing large cap fund in India has given an average return of 16% in the last 1 years. And the poor performing fund in the same category has given -2% return in the last 1 year (as of 13th Nov 2020). Now you would want to select the best performing fund. Don’t you?

In the past, a lot of people have asked me- Sahil, can you please tell me how to select the right mutual fund?

As there are hundreds of mutual funds in the market, it is a big problem to select the right fund. To solve this problem, I have started this series of mutual fund review where I will analyze the mutual funds and suggest if it is a good fund or not.

• Fund Name: Axis Bluechip Fund - Direct Plan-Growth (Please note that I have selected the direct plan option because direct plan does not involve mutual fund agent commission hence the returns are better than regular plans.)
• Fund Category: Large Cap
  
• Fund Inception Date: Regular plan: 5th Jan 2010 and Direct Plan: 1st Jan 2013
• Fund AUM: Rs 18,282 Cr as of 13th Nov 2020. This AUM is 12.26% of all the money invested in the large-cap category.
• Expense Ratio: Direct plan expense ratio is 0.56%. The category average is 1.24%. So the expense ratio of Axis bluechip fund is much below the category average which is great!
• Portfolio: This fund has 84% allocation in large-cap stocks and holds a total of 29 stocks in the portfolio.

(Fund AUM and expense ratio is as of 13th Nov 2020)

Top 10 holding as of 31st Oct 2020

(image Sourse: moneycontrol)

Observation:

• Out of top 10, 4 funds are from the financial sector including HDFC bank, ICICI Bank, Kotak Mahindra Bank, and Bajaj Finance. 2 funds from the IT sector: Infosys and TCS. Rest is diversified across the refinery, FMCG, and retail.
• Out of 29 stocks, top 10 stocks have 65% allocation.

(image Sourse: moneycontrol)

• 1-year return is 11.45% and 3-year average returns are 14%.
• Here, please note that the returns of Axis bluechip funds are as of 13th Nov 2020. This return would change every day based on the NAV movement.

What does it mean?

It means that the 1-year return of Axis bluechip fund is based on NAV on 13th Nov 2020 and NAV on 14th Nov 2019.

On 13th Nov 2020, fund NAV was 38.06 and NAV on 13th Nov 2019 was 34.14. So if you calculate the return, IT WOULD BE 11.4%.

Likewise, the 5 year returns are based on NAV on 14th Nov 2015 and 14th Nov 2020. Next day when you will check the return, the 1 year return will be based on the NAV on 15th Nov 2020 and NAV on 15th Nov 2019. This would change every single day. So if tomorrow the market crash and NAV fall, the returns would reduce and you might think that the mutual fund is not good.

This is called point to point return and it is not the right approach to measure the performance of the mutual fund.

And that’s where Rolling Return comes into the picture.

In this, you calculate the returns based on NAV on each date. For example, if you calculate 1 year rolling return, then NAV on 13rd Nov 2020 would be compared with NAV on 14th Nov 2019. Then 12th Nov 2020 would be compared with NAV on 13th Nov 2019 and so on. Likewise, you can calculate 2 years and 3-year rolling return. Finally, this rolling return has to be compared with the rolling return for the benchmark. Because the ultimate goal of every active fund manager is to beat the benchmark. That’s the reason the fund house is charging a high expense ratio. If the active fund is not able to beat the benchmark, it is a bad fund. So the benchmark for large-cap funds would be Nifty 100 which includes the top 100 companies by free-float market cap.