Summary of "How to Analyse Mutual Funds in 2026? (Stop Trusting Star Ratings Blindly!)"

How to Analyse Mutual Funds in 2026? (Stop Trusting Star Ratings Blindly!)

Mutual Fund Analysis Critique

Star ratings from agencies like Morningstar and Value Research—such as 5-star ratings—do not guarantee:

Future performance
Consistency
Beating benchmarks

Example: - Franklin India Prima Fund (mid cap) and Mirae Asset Emerging Bluechip Fund (large & mid cap) both had 5-star ratings. - Over 5-6 years, Mirae Asset Emerging Bluechip outperformed, while Franklin Prima did not beat its benchmark.

Five-Step Framework to Analyze Mutual Funds

Define Your Investment Goal & Choose the Fund Category Accordingly

For example, if you have a 15-year retirement goal, a flexi cap fund investing across large, mid, and small caps may be suitable.
Screen Funds Based on Rolling Returns
- Rolling returns analyze fund performance over multiple overlapping periods (e.g., every possible 5-year window) rather than a single fixed period.
- This helps identify consistency versus luck in one period.
- Recommended tool: Prime Investor (offers a free trial).
- Example shortlisted flexi cap funds based on 3-year & 5-year rolling returns:
  - Quant Flexi Cap
  - HDFC Flexi Cap
  - Bank of India Flexi Cap (excluded due to <5 years track record)
  - Parag Parikh Flexi Cap
Plot Rolling Returns to Visualize Performance & Volatility
- Examine average returns, frequency of negative returns, and standard deviation.
- Example: Quant Flexi Cap showed high volatility and aggressive swings.
Check Risk Ratios on Morningstar

Key metrics to consider:
- Sharpe Ratio: Return per unit of risk (higher is better).
- Upside Capture Ratio: How well the fund performs in bull markets.
- Downside Capture Ratio: How well the fund protects in bear markets.

Fund personalities emerge from these metrics: - Quant Flexi Cap: High upside capture, thrives in bull markets. - Parag Parikh Flexi Cap: Low downside capture, performs well during market falls. - HDFC Flexi Cap: Balanced ratios, moderate risk-return profile.

Understand Fund Manager’s Style and Strategy
The fund manager’s approach heavily influences fund behavior. Examples:
- HDFC Flexi Cap:
  - Previously managed by Prashant Jain (value style, concentrated portfolio, ~20% CAGR over two decades).
  - Currently managed by Roshi Jain (growth style, fewer stocks), who recently left.
- Quant Flexi Cap: Mechanical, trend-following, market cycle-based; less focus on fundamentals; suited for bull markets.
- Parag Parikh Flexi Cap: Value investing with foreign stock exposure; better in falling markets.

Knowing the manager’s style helps assess fit with your existing portfolio.

Additional Insights

Limitations of Star Ratings
- Based purely on past performance and risk metrics; no forward-looking judgment.
- Ratings can fluctuate with recent performance unrelated to long-term manager skill.
- Example: Prashant Jain’s funds ranked low during the 2016-2020 downturn but later recovered due to his strong track record.
Passive vs Active Funds
- Index investing is simpler and safer for most investors.
- Passive fund market share in India grew from 7% to 17% in recent years.
- Active funds can outperform but require detailed analysis and understanding; star ratings alone are insufficient.
Recommendations
- Use the five-step process to analyze active funds thoughtfully.
- Alternatively, consider index funds for simplicity and reliability.
- Invest time researching fund managers and fund characteristics as you would for major purchases like phones or cars.

Mentioned Assets/Funds

Franklin India Prima Fund (mid cap)
Mirae Asset Emerging Bluechip Fund (large & mid cap)
Quant Flexi Cap Fund
HDFC Flexi Cap Fund
Bank of India Flexi Cap Fund (excluded due to short track record)
Parag Parikh Flexi Cap Fund

Tools & Platforms

Prime Investor: For rolling returns and plotting
Morningstar: For risk ratios such as Sharpe Ratio, Upside/Downside Capture

Disclaimers

Star ratings and past data do not guarantee future performance. The five-step process is one approach; other methods may start with different metrics. This is not financial advice; viewers are encouraged to do their own research.