Future Ready

Most investors make their investment decisions purely on past performance, that is, returns. The trouble with such an approach is that it often fails to suggest how the fund will perform going forward. Analysts and fund trackers must consider factors beyond just performance and focus on more critical parameters. Morningstar calls these parameters the five key pillars — Parent, People, Process, Performance and Price.

Take the case of Franklin India Taxshield Fund, which ranks as the best among the ELSS funds and is rated ‘Gold’. We provide an insight into what good analysts essentially look at within each pillar and how that translates into an opinion on a fund.

Parent: Herein, analysts must look at whether the asset management company is investor-focused or sales-focused. Also important are things like stability of the management team, the AMC’s overall strategy, regulatory compliance and whether fund managers’ compensation is tied to fund performance. Franklin does a good job here, aligning a large part of the manager’s compensation with the fund’s performance and considering performance over longer time periods.

People: Analysts consider talent and skill of managers, supported by a qualified research team, as key for a mutual fund to deliver better returns. Franklin scores here as well. The fund is managed by Anand Radhakrishnan, who is the CIO for Franklin India (Equity). He has extensive experience in the investment industry and has delivered impressive performance with the funds he has managed.

Process: Herein, good fund trackers look at a fund’s strategy and whether the management has a competitive advantage, enabling it to execute the process well and consistently over time. The Franklin fund stands out due to Radhakrishnan’s research-intensive style, which focuses on good quality companies with strong fundamentals and high corporate governance standards.

Performance: Instead of focusing on performance in a specific market environment, good analysts look at a fund’s performance across time periods and across market cycles, while keeping a focus on the risk taken to deliver that performance. Since Radhakrishnan began managing the fund, starting April 2007, it has outperformed both the benchmark index CNX 500 and the average return of the peer group.

Price: The fund’s expenses reduce the returns an investor gets. Our analysts prefer funds which have a lower expense ratio compared with similar funds sold through similar channels. The Franklin fund is neither expensive nor cheap compared to other similar funds.

Therefore, the fund scores a positive rating on four key pillars, and a neutral rating on price. 

The authors are Himanshu Srivastava, Senior Research Analyst, Morningstar India and Atul Pahuja, Senior Research Analyst, Morningstar India

(This story was published in BW | Businessworld Issue Dated 20-03-2015)