Now, we will go through a series of short lectures on selecting different type of mutual funds for a portfolio of mutual funds. We will start with selecting equity funds for a mutual fund portfolio. Within equity funds also we can consider other diversification methods, we could consider selecting equity funds which are large cap mid cap small cap or we could consider selecting equity funds, which are growth funds and venue funds. So, we could have diversified much further. However, for this illustration, we will keep it simple. We will select three equity funds from among sample which we will select at random.
I repeat myself that the equity funds that we will select are by no means any recommendation for investment. Please pay attention to the strategy. Once you understand the strategy well, then you can apply the concepts to make a good selection for yourself. Nowadays, let's discuss the strategy as a first step of the strategy one To find a recommended list of equity funds. Now, there are so many equity funds in any country in any market that it is impossible to study all of them and then make a selection. So we need to have a starting point which is practical.
So, go through any financial, newspaper or journals or websites. These will provide you the top recommended equity funds, which are available in the market at this point of time. Then, don't go by just a recommendation, analyze them and then make a selection. Now, the recommendations can be also got from banks, which act as ISIS or MCs are experts etc. However, remember that all the banks or MCs or experts can have bias towards the equity funds where they have got certain interest. Once you have the initial set of equity funds, conduct the following steps for each equity fund.
Find the top 10 stocks that they agree fund is invested in segregate the top 10 Top 10 stocks into value stocks and growth stocks for each of the value stocks find the F score and then determine the F score for the mutual fund. And similarly for the growth stocks, find each growth stocks GS code and find the GS code for them which will find then combined f score and Z score to find the M score for the equity funds. Once the M score has been determined for each of the equity fund, arrange the equity funds in the descending order of the M score. Once you have the list of equity funds arranged in the descending order of the EMS code from the top make a selection of the number of equity funds that you require. For example, for the sample we are illustrating, we want to select three equity funds.
So from the top we will select 350 funds. So now we have a strategy. To understand the strategy. Let us put it through an example. See how it works for the sample illustration that we are trying to make. Now, I will skip a few steps.
For example, I we have already discussed how to find the F score g score etc. So, we will skip the steps of going through the calculations for determining the F score g score, I will use some samples which I have done in the past. Now, these samples used the F score and G score and M score may not exactly match up when you try to do the same and the current time because the nature of the stocks may have changed over time or the performance of the stocks may have changed over time. For our illustration, we will consider the initial set of seven equity funds. Now out of the seven equity funds, we will make a selection of three equity funds. The seven equity funds that we consider our our entire business on a pure value fund as a weedless online frontline equity fund, access focus 25 fund access long term equity fund, Franklin India blue chip fund and idfc core equity fund reliance small cap fund.
Now you see that there is a diversification within these funds also, there are some value funds there are some growth funds. Also there are some large cap funds there are some small cap funds. So, you should always consider diversification when you're looking at investments. I must reiterate that I have picked up these funds at random This is not any form of recommendation which is being provided from this course. Next, we determine the M score for each of these equity funds. Now, we have gone through in details how to calculate the M score.
So, we will not repeat all those steps or so many mutual funds. Instead, what I have planted the figures as I have calculated for this mutual funds. As I told you previously, the figures if you calculate once again may be different from what the figures you're saying here because the performance Have the mutual fund over the years may have changed or the portfolio itself may have changed. Even if the portfolio has not changed some of the stocks in the mutual funds may have changed the nature from being a growth stock to a value stock or from being a value stock to a growth stock. Nevertheless, this is for illustration, so, you can see that I have calculated the M score for each of the mutual funds and the M scores are given here. Next, I have arranged the mutual funds in the descending order of their m scores.
So, according to our strategy, we should select the top three for investing in in our portfolio. So, the top three come out to be access long term equity fund access focus 25 fund and a little bit less unlike frontline equity fund. From our strategy of selecting equity funds based on the EMS code, we have actually found a mechanism by which we are saying that these are the mutual funds which have a maximum potential of providing high returns In the future, however, let us see what is their current performance at this point of time. From Economic Times website, I have gathered the metrics for each of the three mutual funds that we have selected, we notice that each of the three mutual funds provide a fairly high rate of return this rate of return what is what is being provided right now, is definitely above the normal market rate of return.
Also, we noticed that all the three mutual funds are fairly risky because the standard deviations are high, we notice that the R squared value is fairly close to one. This means that the beta value of what we have should be fairly significant. Now, the beta value for all the three mutual funds is fairly close to one that means it should be mimicking how the market is going to behave in the future. Also, we noticed that the Sharpe ratio 10 edition sortino ratio for all the three mutual funds is fairly high. So this seems to suggest that the mutual funds that We have selected the equity firms that we have selected rather are a fairly good selection. Now, after making the selection to the strategy that we have prescribed, it is better always to verify whether the strategy is been providing a right result or not.
So, the fundamental analysis of all the mutual fund should be conducted after making a selection through the strategy of equity funds that we have just discussed. So, for the moment, we will consider that for the rest of the discussions on creating portfolio of mutual funds, we will use access long term equity fund access focus 25 fund on a BSL frontline equity fund as a three equity funds that will we will form as a part of our portfolio. Thank you for listening. See you in the next lecture.