Most Finance and investment companies, these days, recommend various investment options on the basis of past returns. This way, the mutual fund scheme which has generated the maximum returns over the past 5 (or 10) years is ranked 1, the next scheme ranked second and so on;  and then they are recommended accordingly.

 

Sufficient data is available to establish the fact that the best performing funds in 2010 were no longer the best in 2015 and similarly the best performing funds in 2015 were no longer the best funds in 2020. Taking this into account, it shall be erroneous to assume that the best funds of today will continue to give the best returns over the next 10 years-the period for which we are investing in. 

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This has been explicitly set forth by Mr. Alroy Lobo, Head of Kotak Investment Advisors in his interview with Mr. Saurabh Mukherjea, one of the finest fund managers in India in the book Gurus of Chaos – Modern India’s Money Masters:

“The way mutual funds are evaluated is that investors and distributors look at the track record but that does not tell you what your future performance is going to be. If someone is number one and has taken an excessive risk to be number one then next year he could be ranked last. That means there has to be a far greater assessment of the portfolios, far deeper understanding of investment philosophies but that does not happen. As a result, ultimately the funds that start to get money are those that do well for one year or 3 year period with the belief that they will do well in the next 1-3 years also. But there are funds that have done well for 10 years also and to do that they have followed a philosophy.” 

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Hence the real challenge lies in identifying the funds which have the potential to generate the best returns over the next 10 years. It is interesting to note that most of the investors don’t really look at the fund manager, the investment philosophy, or the actual portfolio/standard of the companies in which the fund has invested. Finacular is trying to solve this problem by analyzing the quality of the actual underlying companies in which the fund has invested in. We believe that if a fund has invested in stellar companies today, it will assuredly generate outsized returns in the future. 

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Using proprietary algorithms, various financial ratios, and in-house qualitative research, we are trying to identify such mutual fund schemes which are being run by eminent fund managers with clear, well-defined investment philosophies and excellent underlying portfolios. There is hardly any company in India that tries to do this.