Analysing a Mutual Fund

All Investors investing in Mutual Fund are faced with the decision whether to invest in a particular Mutual Fund or not. In most of my investing in Mutual Funds, I have relied on the advice provided by the different brokers. However, I found that these advices are not always reliable in terms of getting reasonable returns from Mutual Funds.

Provided here is a method to analyse Mutual Funds. This method can be applied on the Mutual Funds investing primarily in Equities. We generally refer to these Mutual Funds as Equity Mutual Funds.

I demonstrate the analysis method using an example. The Mutual Fund we will analyse in this post is “Axis Focused 25 Fund“.

Step 1: Find out the Allocation of Funds for the Mutual Fund

For Axis Focused 25 Fund, the allocation of funds is as follows:

Equity 91.24% Rs. 1422.13 crores
Debt 9.21% Rs. 342.07 crores
Others -0.45% – Rs. 16.71 crores

An allocation of a negative number implies that funds have been borrowed from other means to finance the remaining options. In this case, funds equivalent of Rs. 16.71 crores has been borrowed from some means to finance the Equity and Debt components of the Fund. The borrowed portion would have to be paid back by the Fund.

From the above figures we can definitely say that this is a Equity Fund as it is largely invested in Equities.

Step 2: Find out the companies where the Mutual Fund is invested

Next we figure out the companies where this fund is invested.

We find that this Fund has invested 57.42% of its equity investment in 10 companies. So, we can definitely say that the movement of the stocks of these 10 companies will determine the future position of this fund. So, if we analyse the potential of these 10 companies, we can get a reasonable estimate of this fund will perform in future.

These 10 companies are listed below.

Company %age Allocation Value (in Rs. Crores)
Kotak Mahindra Bank Ltd. 7.85% 291.55
HDFC Bank Ltd. 7.59% 281.74
Tata Consultancy Services Ltd. 6.70% 248.95
Maruti Suzuki India Ltd. 5.90% 219.20
Supreme Industries Ltd. 5.88% 218.31
Shree Cement Ltd. 5.58% 207.31
Bajaj Finance Ltd. 5.01% 186.04
Bajaj Finserv Ltd. 4.87% 180.93
Gruh Finance Ltd. 4.36% 162.09
Motherson Sumi Systems Ltd. 3.68% 136.79

Step 3: Separate the Value Stocks from Growth Stocks

We need to have separate investing strategies for Value Stocks and for Growth Stocks. Thereby, we need to separate the Value Stocks from the Growth Stocks. To differentiate between the Value Stocks and Growth Stocks, we need to determine the Book Value and the Market Value of each of the Stocks.

Book Value is the Shareholder’s Equity as per the latest Balance Sheet.

Book Value = Total Assets - Total Liabilities

Market Value is the product of Number of Shares and the Share Price.

Market Value = Number of Shares * Price per Share

We can find the Book Value per Share as follows:

Book Value per Share = Book Value of the Company / Number of Shares

Next, we can find the Price to Book Value as follows:

Price-to-Book Value (P/B) = Current Share Price / Book Value per Share

One way to segregate between Value Stocks and Growth Stocks is to consider Stocks with Low Price-to-Book Value as Value Stocks and the Stocks with high Price-to-Book Value as Growth Stocks.

For example, the Price-to-Book Value of Kotak Mahindra Bank is 6.16. In other words, the Stocks is valued at over 6 times to that of its Book Value. So, we can categorise this as a Growth Stock.

Company Book Value / Share Price Per Share Price-to-Book Value
Gruh Finance Ltd. 37.76 681.80 18.06
Bajaj Finance Ltd. 174.59 2,100.60 12.03
Supreme Industries Ltd. 133.49 1,264.80 9.47
Shree Cement Ltd. 2,209.71 16,102.00 7.29
Maruti Suzuki India Ltd. 1,227.84 8,810.40 7.18
Kotak Mahindra Bank Ltd. 211.66 1,304.70 6.16
Bajaj Finserv Ltd. 1,014.90 5,770.95 5.69
HDFC Bank Ltd. 423.71 2,063.60 4.87
Motherson Sumi Systems Ltd. 74.85 307.65 4.11
Tata Consultancy Services Ltd. 446.80 1,721.60 3.85

We notice that all the Stocks have a fairly high Price-to-Book Value. So, we can consider them all as Growth Stocks.

Consider the stock – Suzlon Energy Ltd. The Book Value per Share is -13.6 and the Share Price is 7.85. So, the Price-to-Book Value is -0.59. So, this would qualify as a Value Stock.

Also, consider the stock – National Aluminium Company Ltd. The Book Value per Share is 52.8 and the Share Price is 68.80. So, the Price-to-Book Value is 1.31. So, this would also qualify as a Value Stock.

Step 4: Evaluate the Growth Stocks based on G-Score

G-Score was formulated by Professor Mohandas to provide a score out of 8 for a Stock. We apply the G-Score to Growth Stocks. For the Value Stocks, we apply F-Score as formulated by Piotrosky.

The higher the G-Score for a Stock, the better it is to invest in the stock.

The G-Score is calculated based on 8 parameters. The 8 parameters are as follows:
G 1: Earnings return on assets
G 2: Cashflow return on assets
G 3: Accruals
G 4: Stability of earnings
G 5: Sales Growth variability
G 6: R & D intensity
G 7: Capital expenditure intensity
G 8: Advertising expense intensity

I will discuss the method for calculating the 8 parameters of G-Score in a separate post. Given here are the G-Score Calculations for the 10 companies that we have been discussing so far.

Company G1 G2 G3 G4 G5 G6 G7 G8 G-Score
Maruti Suzuki India Ltd. 1 1 0 1 1 1 1 1 7
Tata Consultancy Services Ltd. 1 1 1 1 1 1 1 0 7
Bajaj Finance Ltd. 1 1 1 1 1 0 0 1 6
Shree Cement Ltd. 1 1 0 1 1 1 1 0 6
Kotak Mahindra Bank Ltd. 1 1 0 1 1 0 1 1 6
Bajaj Finserv Ltd. 1 1 1 1 1 0 0 1 6
HDFC Bank Ltd. 1 1 0 1 1 0 1 1 6
Motherson Sumi Systems Ltd. 1 1 0 1 1 1 1 0 6
Supreme Industries Ltd. 1 1 0 1 1 0 1 0 5
Gruh Finance Ltd. 1 1 0 1 1 0 0 0 4

Now that we have the G-Scores of the individual Stocks, we can compute the G-Score of the Portfolio by taking the weighted average of all the G-Scores.

Company G-Score Weight Contribution
Kotak Mahindra Bank Ltd. 6 7.85% 0.4710
Tata Consultancy Services Ltd. 7 6.70% 0.4690
HDFC Bank Ltd. 6 7.59% 0.4554
Maruti Suzuki India Ltd. 7 5.90% 0.4130
Shree Cement Ltd. 6 5.58% 0.3348
Bajaj Finance Ltd. 6 5.01% 0.3006
Supreme Industries Ltd. 5 5.88% 0.2940
Bajaj Finserv Ltd. 6 4.87% 0.2922
Motherson Sumi Systems Ltd. 6 3.68% 0.2208
Gruh Finance Ltd. 4 4.36% 0.1744

Net G-Score of the Portfolio = 3.4252

This G-Score can be compared with the G-Score of other Mutual Funds to decide which one to invest in. The higher the G-Score, the more preferred the Mutual Fund should be.

Step 5: Evaluate the Value Stocks based on F-Score

Just like we computed the G-Score for Growth Stocks, we can compute the F-Score for Value Stocks. F-Score as formulated by Piotrosky. It has 9 parameters and thus gives a score between 0 and 9 for each Stock.

The 9 parameters of F-Score are as follows:
F 1 – Return on Assets (ROA)
F 2 – Cash Flow from Operations
F 3 – delta ROA
F 4 – Accrual
F 5 – delta Leverage
F 6 – delta Liquid
F 7 – Equity Capital
F 8 – delta Margin
F 9 – delta Turnover

We can adopt the same method we used for G-Score to determine the Net F-Score for the Portfolio. We can compare this with the Net F-Score of other Mutual Funds. The higher the F-Score, the more preferred the Mutual Fund should be.

Step 6: Calculate the net of F-Score and G-Score

As a final step, we can calculate the Net of G-Score and F-Score as the Overall Score for the Mutual Fund. This can be done by taking the weighted average of the F-Score and G-Score. The weight of the F-Score is the proportion of investment in the Mutual Fund in the Value Stocks. Similarly, the weight of the G-Score is the proportion of investment in the Growth Stocks.

The Mutual Fund with the higher Overall Score should be preferred for investment.

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