Our Methodology
1 Finance employs a systematic, algorithm-based approach to research and score hybrid mutual fund schemes. Our methodology ensures effective ranking by evaluating equity and debt allocation based on key parameters.
Here’s how the hybrid scheme is assessed.
Key Ratio Analysis
We start by analysing key ratios based on the past 10 years of data or available data.
- Sharpe Ratio
Measures investment return relative to its volatility, indicating how much excess return an investor receives for taking on additional risk.
- Sortino Ratio
Similar to Sharpe Ratio, but focuses solely on downside risk, providing a better assessment of an investment's performance in unfavourable conditions.
- Treynor Ratio
Evaluates investment return adjusted for systematic (market-related) risk, helping investors compare investments based on their sensitivity to market movements.
- Jensen's Alpha
Compares an investment's actual return to the expected return based on its market risk.
Fund’s Age
The longer the track record of a mutual fund, the greater the accuracy of the results that can be assessed.
Here’s how the debt portion of a hybrid scheme is assessed. We analyse the debt component of the hybrid fund by considering the following three factors:
Net Yield to Maturity (YTM)
YTM quantifies anticipated returns when held until maturity, adjusted for expense ratios. This precise calculation factors in timely interest and principal payments.
Quality & Diversification Analysis
Evaluates portfolio quality by analysing credit ratings of bonds and securities. Diversification across securities is assessed to gauge risk exposure.
Modified Duration
Modified duration is a measure of how much the price of a bond or debt fund will change in response to a change in interest rates. It adheres to the concept of the inverse correlation between interest rates and bond prices, reflecting the fund’s sensitivity to market interest rate movements.
To illustrate, consider a debt mutual fund scheme with a modified duration of 4 years. If interest rates decrease by 1%, bond prices would increase by 4%, over and above as per its YTM growth resulting in a higher return on the investment. However, the situation can turn unfavourable when interest rates rise.
Asset Under Management (AUM):
AUM stands for the total market value of funds managed by asset management companies for investors. It's a key factor for investors, reflecting a fund's track record and trustworthiness. Higher AUM suggests increased liquidity and diversification.
AUM is important while evaluating both equity and debt components of hybrid mutual funds, as it provides valuable insights into the fund's overall stability and investor confidence.
Final Score Calculation
The final fund score is calculated by amalgamating the scores obtained from key ratio analysis, debt analysis, and AUM analysis.
Mutual fund schemes are scored on a scale of 0 to 100, with 100 being the highest score and 0 being the lowest.
Ranking
Rankings are determined by assessing the final scores of the funds, thereby showcasing their relative standings within their respective categories.
Note - The 1 Finance scoring and ranking model is updated quarterly. Our analysis includes all hybrid category funds with a track record of more than 1 year, ensuring the most current and relevant insights for investors.