How We Did It

WHERE SHOULD YOU INVEST in 2023? While past performance is one criteria to select funds, consistently performing schemes which cushion downsides are the best bets. Fortune India devised a two-stage methodology of quantitative and qualitative assessment to identify the top three investment options in 15 categories across mutual funds, insurance and NPS (National Pension System).

Morningstar India was our knowledge partner for mutual funds and SecureNow for life, health and motor insurance. Quantitative work on the data for NPS Funds was done in-house. For qualitative assessment, the data was placed before a jury to identify the top three in each category. The jury comprised of Ashish Gumashta, executive chairman, Julius Baer India; Ashish Shanker, MD & CEO, Motilal Oswal Private Wealth; Dhiraj Relli, MD & CEO, HDFC Securities; Rajesh Saluja, CEO & MD, ASK Wealth Advisors; and Vijay Chandok, MD & CEO, ICICI Securities.

What's New?

We used rolling returns instead of trailing returns in calculations to identify the consistently performing schemes while avoiding any recency bias in the performance of the funds. A rolling return is the average of a series of returns over a long period of time. It is like a daily SIP for a certain interval and then an average of the series of returns.

The study also added the best motor insurer category under insurance.

The Process

We considered 10 categories in mutual funds, four in insurance and one in NPS.

Mutual Funds

Equity mutual funds include Large-cap, Mid-cap, Small-cap and All-cap funds. All-cap funds comprise Flexi-cap, Multi-cap, ELSS or tax-saving, Focused Equity and Large & Mid-cap funds. In fixed income, we considered Ultra Short Duration (Ultra Short Duration, Low Duration and Money Market Funds), Short to Medium Duration (Short Duration, Banking & PSU Funds and Medium Duration Funds), Medium to Long Duration (Dynamic Bond, Medium to Long Duration, Long Duration & Gilt Funds), and Corporate Bond Funds. We looked at the best fund managers in equity and fixed income, too.

The study considered funds with a minimum five-year vintage in equity category and minimum three-year vintage in fixed income funds category. Further, schemes with average assets under management (AUM) for the last 12 months falling in the top 95% of the cumulative AUM of the respective category were considered.

In the best fund manager category, those who have been managing two or more eligible funds within the asset class for at least three years were considered.

In equity funds, 70% weight was assigned to returns and 30% to risk (See Table).

In debt schemes, risk assumed a weight of 40-50% in line with the belief that investing in equity is to earn inflation-beating returns whereas, investors in debt schemes demand safety of capital while earning decent returns (See Table).

A final score was reached for each eligible scheme in its respective category as per the weights.

For top fund managers, a composite score was ascertained for each fund manager comprising weighted average of the final score by each scheme managed by them by the one-year average AUM of the fund.

Equity schemes and equity fund managers of Axis Mutual Fund were not considered during the calculations amid an ongoing scrutiny by the regulator.

Insurance

We considered four categories — Best Life Insurer, Best Term Plan, Best Health Insurer and Best Motor Insurer. For the best life insurer, life insurance companies were measured on three broad parameters — sales quality, claims performance and returns performance. Sales quality further included persistency by count, policy complaints and surrenders by value. Persistency was given 30% weight. In claims, death claims and maturity settlement within 30 days were given equal weight of 10% each. An additional 10% weight was assigned to the death claim paid within 30 days. Further, an average of three years annualised returns of participating and non-participating funds were given 10% weight each. FY22 data was used. SecureNow sourced data from public disclosures and IRDAI annual reports.

Once we had the top life insurers, best term insurance plans were identified from the top five insurers. The cheapest term plans among the term plans of top five life insurers were selected.

For the best health insurer, those with fewer than 5,000 claims were removed. Next, parameters like policy complaints (10%), claims payment — health only (40%), claims payment within 30 days — health only (10%), incurred loss ratio (10%) and health-specific ombudsman complaints favouring insurers/total ombudsman complaints (5%) were considered. Ombudsman information was taken from the FY20 annual report.

Insurers with an incurred loss of 80-110% got the lowest score. Loss ratios lower than 80% indicate that the pricing is high and ratios of over 110% indicate that pricing is unviable in the long run and premiums are likely to be increased. Too low a loss ratio suggests prices were set too high.

Motor Insurance

Three broad parameters — sales quality (20%), claims performance (60%) and fair pricing and complaint handling (20%) were evaluated to come up with the best insurers. In claim performance, insurance companies with a claim settlement rate for motor own-damage of over 95% were given 40% weight. A claim settlement rate of less than 85% was given null score. Claim settlement rate is claims paid/total claims decisions taken. Insurers who paid over 95% of claims in 30 days were awarded an additional 20% weight.

NPS Funds

Three categories — equity, corporate debt and government securities — were considered under Tier 1 NPS schemes. As a basic eligibility criteria, pension funds with less than seven years of existence were removed. Returns and three-year compounded average growth in AUM were assigned a weight of 80% and 20%, respectively. Within the 80% return weight, AUM-based weight was assigned to the three schemes under consideration. To find out the return score for each pension fund in the above mentioned three categories, seven-year return was given the highest weight of 50%, followed by 30% weight to five-year return and the remaining to three-year return. The top five scorers were the nominees.

No futuristic projections were made during the process in any of the categories.