How to select an equity mutual fund – Creating a shortlist

Published: June 3, 2015 at 7:19 am

Any selection process should have three components: (a) an objective; (b) a method to create a shortlist and (c) a method to finalize with the shortlist.

Yesterday we discussed the objective. Today we shall consider how to create a shortlist from which an equity mutual fund can be selected.

If you have not read yesterday’s post, I strongly urge you to do so before reading this any further:

How to select an equity mutual fund -preamble

Update: Now I provide monthly screeners

Creating a shortlist

Note:  The description of the shortlist may appear long. In practice, you should be able to create one in under 150 minutes on your first attempt and in under 10 minutes later.  So please hang on.

Creating a shortlist is as important as it is difficult. The criterion used to create one is arbitrarily chosen and is based on personal comfort. It can neither be too broad (meaning too many funds to analyze deeper), nor too narrow (if only a few funds satisfy us, then they are likely to fall out of favor soon). F0r example, the rating of a five-star fund can only go down!

We need to cast a reasonably broad net to create the shortlist.  Peer comparison is a necessary evil to create the shortlist. I prefer to abandon all peer comparison once the shortlist is prepared.

The primary reason for that is simple: before selecting a fund, we are analysts. After selection,  we are investors. Analyst and investors will have very different numbers (returns/risk metrics) to stare at when the asset class is volatile.

Once I invest, I take decisions based on the health of my portfolio tagged to a specific goal. Many make the mistake of worrying about peer comparison, view their holdings like analysts instead of viewing it as investors.

I will discuss two methods of creating this shortlist: with value research online and with Morning Star. It is easy to extend this method to other portals.

Shortlisting with Value Research Online

Update: You can now use these tools which get data from Value Research directly: Mutual Fund Screener Version 6.0

and Freefincal Mutual Fund Screener with SIP Returns

This is the method discussed in the previous version: Step-by-Step Guide to Selecting a Mutual Fund

Since the time it was written, VR online made a crucial change: It removed the “last seven years trailing return” entry from the category listing.

Trailing return simply refers to the CAGR for the last 1/3/5/7/10  (etc.) years at any given point in time. If I am not wrong, VR updates this each month.

Removal of the 7Y return has made the shortlist a bit longer.

Let us know go through this process, step by step. Click on the images to enlarge them if you wish.

1) Go to

Skip the annoying ad, go to the main page and scroll down until you see ‘research tools‘.

We will be working with the ‘Fund selector’


2) Leave the fund house  entry alone.

In the fund category entry (left image bel0w), uncheck whatever is checked and check “Equity: large cap” (we assume that is the category we are looking to invest in. The process for other equity categories is the same).

In the exclude entry (right image below),

a) check plans suspended for sales

b) check direct plans (adding them will only clutter the process. The folios and relative performance for regular and direct funds is the same).

c) check closed-ended

Scroll down and uncheck 3 star, 2 star, 1 star and unrated (optional).


When ready, click “Get Data”.

3) You will be taken to this sheet. Click on returns.


4) You will then be taken here.


We will now discuss two methods of shortlisting consistent performers.

A) Anchor the search with 5-year returns. Click on 5-years returns (red box above) once or twice until the fund are arranged in ascending order.  Then you need to decide the cut-off rank.  Suppose we select funds which were ranked in the top 25 over last 3 years, 5 years and 10 years, we will get something like this (partial list).



Invariably we have shortlisted many (not all) 5-star or 4-star funds which are less than 10 years old.   If you are fine with this, then you can proceed.

By removing the 7-year entry, VR forces us to rely on its star rating more. Who are they to tell us (at least me) that it is enough to review only 5-year and 3-year histories?

I prefer a fund which has consistently been in the top 25 for 3, 5 and 10-year periods. So I would like to click on the 10-year returns until they are arranged in ascending order and then create the short list.

Top 25 might sound too broad.  Narrower the net, higher the expectation and sooner the fund is likely to disappoint.

As far as I am concerned, I will not repeat this exercise unless the selected fund is a laggard in my folio after giving it at least 3 years to perform. Laggards are not identified by peer comparison (drop in star rating etc.) but with respect to net XIRR of the equity portfolio. See more here: How to review a mutual fund portfolio

B) Anchor the search with 10-year returns. Click on 10-years returns once or twice until the fund are arranged in ascending order.  Then you need to decide the cut-off rank.  Suppose we select funds which were ranked in the top 25 over last 3 years, 5 years and 10 years, we will get something like this (partial list). Funds marked in red have done well in the past but not in the recent future  relatively.



We now have more 10-year old funds and the dependence on star rating is lower. The shortlist also is a bit smaller.

I am more comfortable with this. Now that we have a shortlist, we are ready to analyze further. Before that AMC bias may shorten the list further (we are humans, not machines).

I may prefer a Franklin, HDFC or ICCI over Kotak, Tata or DWS. I may already have an account in one of the amcs!

Had we shortlisted only 4 and 5-star funds, we will end up with 19 funds. This way (with 5-year or 10-year anchoring) we only have 9-10 to choose from.

We will take up further analysis in the next post on this series. I would now like to discuss a faster way to shortlist with Morning Star.

Shortlisting with Morning Star Screener

Morning Star India has a nice screener which can automate the above shortlisting and reduce it down to minutes.

However, it has only large cap and mid/small cap categories. Unlike Value Research which distinguishes among large cap, large and mid-cap, mid and small-cap and multi-cap.

This can present a considerable problem unless we look at the folio carefully.  When I tried out a large cap short-list I end up with many large and mid-cap funds.  If you can handle this, this is a smart way to create a shortlist.

1) Go to

First make the following choices. The total results  will vary according to the choices. If it is zero, it means you will have to change the choices.



Inc stands for dividend option and Acc stands for growth.

Scroll down  to further make the following choices




First choose 3-year, 5-year and 10-year returns above the category average.

As you set the option for each year, have an eye on the total results at the top. It should not become zero.  If it does, you will have to change or relax your options.

With the above choices, 15 funds to choose from.

Play around with the morning star risk rating  ( low, below average, average, above average, high) and

3-year standard deviation to see if you can reduce the shortlist.

Low –> 0 results

  • Avg (below average) –> 3 results

Avg –> 6 results

-Avg and Avg –9 results  (I like this)

You can choose what you like.

Further modifications can be done with the so-called Morning Star Syle Box.

For large cap funds choose:

Large and Growth (stocks with substantial earning, high PE, high PB)



A good 14 out of the 15 shortlisted funds belong to this category. One to large and a blend of value (underpriced stocks with low PE and low PB) and growth.

If you don’t understand this, you can ignore the style box for a start or read more about the difference between growth and value stocks or about the morning star style box.

Don’t worry about AUM of a large cap fund. For a mid and small cap fund, it is not a terrible idea to choose the fund with smallest  AUM after further analysis.

Mid and small cap funds with large AUM (say more than 5000 Crores) tend to have more large cap stocks for liquidity.

Reducing the expense ratio even by one step makes the total results count go to zero!

Finally, hit search  to get this  shortlist.



Do not jump to conclusions that the shortlist has only 4/5-star funds and that could have been the lone criterion.

If you tried that you will have 43 funds to contend with instead of just 14.

Out of this 14, you will need to weed out the large and mid-cap funds in consultation with Value Research if you are not looking for one!

We are now ready to analyze further.  This is equally simple. I will take that up in a different post.

Was this not easy? Anybody with a little common sense can do this.

DIY and go direct. Do not trust anyone who says that mutual fund selection is hard.  They say so because they have a  business to run.

DIY implies doing everything yourself. Not making a shortlisting and asking others. If you don’t have confidence (time is not the issue), get yourself a fee-only financial planner who will suggest direct mutual fund plans.

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Part 3: How to select an equity mutual fund – Making a Choice!

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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