After being in stupor for years, the Indian stock market gained ground in 2014, owing to the election of a majority government at the Centre. From March 2014 to March 2015, the Bombay Stock Exchange (BSE) Sensex rose from 22,400 to 28,500. Although this translates into a gain of 25 per cent, mutual funds that invest in stocks did better. As our latest edition of annual mutual fund rankings by Value research shows, they beat all asset classes, with large-cap funds delivering an average return of 31 per cent, large and mid-cap funds 43 per cent and multi-cap funds 48 per cent.The out performer was the mid- and small-cap category, which returned 67 per cent, followed by tax planning funds (47 per cent). Among sector funds, pharmaceutical funds topped with 67 per cent returns. Infrastructure funds were close behind with 52 per cent returns as the government’s thrust on building infrastructure pushed up stocks in the sector. Banking funds followed with 41 per cent returns owing to reduction in interest rates by the Reserve Bank of India (RBI). But the sector was plagued by the under performance of PSU banks owing to their high nonperforming assets.Returns from technology funds were slightly subdued (33 per cent) compared to others owing to the cyclicality of rupee earnings and investors’ preference for other high-beta sectors. Funds that invest in the fast-moving consumer goods companies delivered 26 per cent returns. However, investors must understand that these returns average out over the long run and they must invest based on their risk profile and investment objective. For first-time investors, largecap diversifi ed equity funds are the best, as they have lower volatility.advertisementClick here to Enlarge Further, they should stay neutral about short-term market movements and continue to invest systematically for the long term. Investing through the systematic route and diversifying across asset classes is the best way to deal with market volatility. Debt funds also gave double-digit returns as the RBI cut interest rates by 50 basis points from eight per cent in December 2014 to 7.50 per cent. Fall in interest rates and yields is good news for bond investors as interest rates and bond prices share an inverse relationship; a fall in interest rates leads to a rise in bond prices, increasing net asset values of income funds. However, of late, some volatility has returned to the market due to global sell-off in debt markets, including in India, concerns over increase in US interest rates and uncertainty about monsoon and, hence, inflation. These have led to an increase in bond yields.Hence, it may be prudent to invest in these funds based on your risk profile and objective. Investors with a short-term horizon of less than six months could invest in ultra short-term plans. For an investment horizon of six months to one year, they can look at short-term income plans. For a medium-term horizon of one year and more, accrual funds (that focus on interest payouts) could be a suitable investment. Investors with a longer horizon of more than three years can invest in duration funds, which gain from capital appreciation as well as earn interest income. We bring you a detailed analysis of how funds in each category fared in 2014/15.Click here to Enlarge EQUITY FUNDS Returns from the large-cap equity category have been in line with the rise in the Sensex with top performers delivering between 30 per cent and 40 per cent. Out of 83 schemes in the category, two thirds beat the 27 per cent returns given by the Nifty for the year ended March 2015. The worstperforming fund equity returned 14 per cent. Axis Equity Fund, the top performer, returned 34 per cent, followed by UTI Equity Fund and JP Morgan India Equity Fund, which returned 43 per cent and 44 per cent, respectively. These are closely followed by Religare Invesco Business Leaders Fund and ICICI Prudential Focused Blue chip Fund.JP Morgan Equity Fund, Religare Invesco Business Leaders Fund and LIC Nomura Growth Fund are the new entrants in the top 10 list this time. Large & mid-cap funds, which invest 60-80 per cent money in large caps and the rest in mid-caps, did better than the large-cap funds and returned 43 per cent on an average. Top-rated funds in the category, SBI Bluechip Fund (highest score), ICICI Prudential Indo Asia Equity Fund and L&T Equity Fund, delivered more than 45 per cent. BNP Paribas Equity Fund, SBI Magnum Multiplier, Franklin India Flexi Cap and The Prima Plus returned in excess of 50 per cent. Religare Invesco Dynamic Fund is the new entrant in the top 10 list this year along with Tata Equity Opportunities Fund. Mid-cap and small-cap funds have done wonders to investors’ portfolios. These invest in midcap and small-cap companies, which are more volatile than the large-cap companies. The risk paid off in 2014/15. The category gave returns of 66 per cent, much more than the 50 per cent rise in the CNX Midcap Index and the 52 per cent spike in the CNX Small cap Index. Franklin India Smaller Companies Fund has been consistently featuring among the top 10 in the category. It returned 77 per cent during the year. In terms of returns, DSP Black Rock Micro Cap fund beat the rest with a return of 98 per cent.advertisementJP Morgan India Mid and Small Cap Fund, a new entrant in the top 10 list, gave returns of 82 per cent. These have done exceedingly well over the last fi ve years, returning more than 20 per cent every year. Some of the last year’s top 10 players, IDFC Premier Equity, SBI Emerging Businesses and Axis Mid Cap, have slipped this year. However, they continue to do well Multi-cap funds have a wide mandate. They invest without any sector or market-cap bias and so have more room for stock selection than others. The average category returns are 48 per cent. Tata Ethical Fund and Mirae Asset India-China Consumption Fund continue to be in the top 10, returning 47 per cent and 45 per cent, respectively. The top fund in the category is a new entrant, Franklin India High Growth Companies Fund, with a score of 0.93 and returns of 73 per cent.Dividend yield funds also fall in this category as they invest in companies with different market capitalisations. BNP Paribas Dividend Yield Fund returned 55 per cent during the year. Birla Sun Life Advantage Fund replaced last year’s top performer, Birla Sun Life Equity Fund. Most other funds continued to be in the same slot as last year. Tax-planning funds, also known as equity linked savings schemes, are eligible for income tax deduction under Section 80C of the Income Tax Act (up to `1.5 lakh). The category delivered average returns of 47 per cent in 2014/15, comparable to many large-cap, mid-cap and multicap funds. In the category, Axis Long Term Equity maintained its top slot with a score of 0.84 and a low risk grade. It returned 62 per cent. Its closest followers are ICICI Prudential R.I.G.H.T. Fund, SBI Tax Advantage Fund – Series II and BNP Paribas Long Term Equity Fund – they all returned around 59 per cent. While Quantum Tax Saving Fund and Franklin India Tax Shield Fund fell out of the top 10 list, three new funds – BNP Paribas Long Term Equity Fund, IDFC Tax Advantage Fund and Birla SunLife Tax Relief 96 Fund – got a fi ve-star rating this year. Among sector funds, banking funds are being featured for second time in our annual mutual fund rankings, which is purely a function of their emergence in the last couple of years.Click here to Enlarge The category delivered average returns of 41 per cent. The top performer, ICICI Prudential Banking and Financial Services Fund, returned 52 per cent. It is followed by Reliance Banking (49 per cent) and Religare Invesco Banking Fund (47 per cent). There has been a big divergence in performance of banking stocks with the overall banking index up 42 per cent in 2014/15, but the PSU Banks rising just 25 per cent. This can be attributed to volatility in interest rates and rising NPAs of government-owned banks. Infrastructure funds have turned around in the last two years owing to the impetus the sector has got from the government.advertisementThe 52 per cent category returns in the last one year made up for the three-year return of 17 per cent. However, on a fi ve-year basis, the category has returned only seven per cent compared to 11 per cent a year rise in the Nifty. Franklin Build India Fund has scored the highest in the category again with 85 per cent returns and lowest risk grade. It is the only fund that has managed to deliver 20 per cent a year on a fi ve-year basis. The other fund with fi ve-star rating in the category, Religare Invesco Infrastructure Fund, has moved up to the second place from fi fth last year, returning 77 per cent. Kotak Infrastructure and Economic Reform Fund and Canara Robeco Infrastructure Fund returned above 60 per cent, though on a relatively higher risk base.TOP HYBRID FUNDSHybrid equity-oriented funds delivered 37 per cent returns on an average. Known as balanced funds, they invest majority of assets (65 per cent) in equities and the rest in debt. These funds are taxed like equity funds (gains after one year and dividends are not taxed). The debt portion provides cushion when stock markets fall. That is why returns from these funds are less volatile than those from pure equity funds. The best performer, Tata Retirement Savings Fund, delivered a return of 58 per cent. It is a new entrant in the top 10 list. SBI Magnum Balanced Fund, Tata Balanced Fund and L&T India Prudence Fund returned 44 per cent, 53 per cent and 46 per cent, respectively. HDFC Balanced Fund continues in the top 10 list, followed by ICICI Prudential Balanced Fund and ICICI Prudential Balanced Advantage Fund. Franklin India Balanced Fund and Birla Sun Life 95 Fund are back in the top 10 list, albeit with a little higher risk rating.Hybrid debt-oriented funds invest a bigger chunk of investor money in debt and the rest in equities. They are called aggressive or conservative depending upon their allocation to equities. Among funds with a higher allocation to equities, Escorts Opportunities Fund has the highest score of 1.11. On a relatively lower risk base, the fund gave returns of 33 per cent. It is followed by Birla Sun Life Monthly Income Plan II – Wealth 25 Plan, which returned 27 per cent (with equity allocation of 25 per cent). Conservative funds were not too far behind, with ICICI Prudential Child Care Plan -Study Plan – Regular Plan, scoring the highest with a return of 31 per cent, followed by SBI Magnum Monthly Income Plan (19 per cent) and Franklin India Monthly Income Plan (22 per cent), albeit with relatively higher risk. Some conservative funds are better known as Monthly Income Plans. They invest just 15-25 per cent money in equities. They pay regular dividends but are not obliged to do that under the law. Click here to EnlargeTOP DEBT FUNDSLiquid funds gave an average return of nine per cent, with top performing ones returning 9.2 per cent. As money market rates continued to be attractive, these returns are in line with those given by many ultra short-term funds. This category is least affected by interest rate movements. Among liquid funds, JM High Liquidity Fund and Tata Money Market Fund have been rated fi ve-star. They returned nine per cent each. Ultra short-term funds delivered average returns of nine per cent, in line with the performance of liquid funds, owing to the short maturity of their underlying portfolio. The average maturity of ultra short-term funds over the last 12 months has been six months to one year, which makes it ideal for a similar investment horizon. Taurus Short Term Income Fund scored the highest with a return of 9.75 per cent. It qualifi ed as an ultra short-term fund due to the tenure of papers held by it.There is an interesting candidate in the list, Religare Invesco Credit Opportunities Fund, a credit opportunities fund that has a portfolio of an ultra-short term fund. It returned 9.5 per cent.Short-term funds delivered 10.5 per cent, better than liquid and ultra short-term funds, owing to the longer maturity of their underlying portfolios. The more the duration of a portfolio, the more the fund benefi ts from interest rate movements. These funds typically invest in debt papers. The average maturity of these papers in 2014/15 was between one year and 4.5 years. The best performing funds in this category are Birla Sun Life Treasury Optimizer Fund and Franklin Short Term Fund (12 per cent returns).Birla Sun Life Medium Term Plan also did well with 12 per cent returns.Debt income funds had a volatile year. In spite of this, they have given decent returns. The category average is 13 per cent with the top performing fund, ICICI Prudential Long Term Income Plan, returning 20 per cent. Many returned less than nine per cent, too, as they took conservative bets during the interest rate downturn. Dynamic bonds funds, which play on duration, did well during the period. They benefi ted from interest rate volatility.Click here to EnlargeIn the category, UTI Dynamic Bond Fund gave returns of 15 per cent. Falling interest rates also benefi t gilt funds. The 10-year government bond yield fell from 8.5 per cent at the end of 2014 to 7.7 per cent in January 2015. As a result, long-term gilt funds delivered 17 per cent returns on an average. The best performing fund in the category, SBI Magnum Gilt Fund, returned 21 per cent, followed by Birla Sun Life Gilt Plus (20 per cent). Sundaram Gilt Fund, the new entrant in the top 10 list (it was in the short-term gilt fund category last year), returned 13 per cent on a relatively low-risk base. The fund’s three-year performance (15 per cent returns) is better than that of its peers.IDFC GSec Funds are missing from this year’s top 10. BNP Paribas Gilt Fund and Reliance Gilt Fund are the new entrants in the top 10 league with a superior performance of 19 per cent. The shortterm gilt fund category returned nine per cent on an average with a few funds delivering more than 10 per cent. SBI Magnum Gilt Fund and IDFC Government Securities Fund returned 13 per cent each. The top 10 list in this category is more or less similar to last year’s. Click here to Enlarge VALUERESEARCH RANKING METHODOLOGYThere are 15 fund categories considered for this study. These have been ranked on the basis of risk-adjusted returns.RISK: To calculate risk, monthly/weekly returns were compared with monthly risk-free returns for equity and hybrid funds; for debt funds, weekly risk-free returns were considered. State Bank of India’s 46 to 90 days term deposit rate, which is 5.5%, was assumed as the risk-free return. For months/weeks that the fund had underperformed the riskfree return, the magnitude of underperformance was added. This was then divided by the category average to get a risk score, which was ranked with those of other similar funds, and a relative risk score assigned.RETURNS: Monthly/weekly returns of each fund (adjusted for dividend, bonus or rights) were compared with the monthly/weekly risk-free return to get the fund’s total returns in excess of the riskfree return. The monthly average risk-adjusted return was then divided by the average category return for the return score. In case of negative category average, the risk-free return was used as the benchmark. The returns were then ranked with other funds of the same type and a relative return score assigned. All return estimates assumed reinvestment of dividend adjusted for bonus or rights. Finally, a composite risk-return score was obtained by subtracting the risk score from the returns score.