How do you measure mutual fund performance? In simple terms, it is the change in your net asset value over a period of time. But academics say that while returns are important, what is equally important is the degree of risk taken to achieve that return.

Risk evaluation is a part of any investment process, especially for those investing in equity funds. Risk and return are supposed to be directly proportional to each other. The greater the expectation of losing money in an investment, the greater is the risk for providing a substantial return.

In order to maximise your returns, it is therefore essential to strike a balance between risk and return. How are fund managers doing on this count?

The MoneyLIFE fund screen this time seeks to address this crucial issue by analysing recent fund performance on a risk-adjusted basis. Risk-adjusted returns offer an insight into how much risk a fund or portfolio takes to earn its returns. The higher the risk-adjusted return of a fund, the better its performance.

The widely accepted definition of risk-adjusted returns considers the excess of returns over a risk-free rate divided by the standard deviation of returns over a period of time. This is measured by the Sharpe ratio.

Here goes an analysis of equity diversified growth funds that have optimised their performance on a risk-adjusted basis and ones that have not. We have considered returns between June 14 and November 27 for our analysis, when the market rose sharply after the big fall in mid-May.

The best risk-adjusted returns among equity-diversified funds came from Birla SunLife's Frontline Equity Fund. Its absolute returns stood at 55%, while its risk-adjusted returns over the same period were slightly higher at 57%. Launched in August 2002, the fund has Rs 115 crore (Rs 1.15 billion) in assets under management with 88% of it invested in equities while the balance 12% is carried in cash.

Among its top equity picks are Infosys, Mahindra & Mahindra, United Spirits and VSNL, the last two being recent additions. It has also bought into Grasim, Sterlite, IOB and UTI Bank during the last month.

Second in line was Pru ICICI's Service Industries Fund, which had a risk-adjusted return of 57% against an actual return of 61%. With Rs 367.28 crore (Rs billion) in assets under management, the scheme is 96% invested in equities with only a marginal amount in debt and the balance in cash and current assets.

Among its top equity picks are Tech Mahindra, United Phosphorous, Container Corporation, Infosys and ICICI Bank. It recently added Raymond, Siemens and CMC to its portfolio. Reliance NRI Equity's risk-adjusted returns between June 14 and November 27 stood at 56% against an actual return of 58% over the same period.

With Rs 1,16.51 crore (Rs 11.651 billion) in assets under management, it has a very small and concentrated portfolio of equity which accounts for 83% of its net assets. The remaining 17% of its assets are held in cash. Among its top equity picks are Infosys, Reliance, HPCL and HLL. Tata Motors, Indian Overseas Bank, TCS and Suzlon were recent additions to its portfolio.

HDFC Growth Fund followed closely with a risk-adjusted return of 55% against an actual return of 56%. The scheme has Rs 359.56 crore (Rs 3.595 billion) in assets under management, 97% of which is invested in equities and the balance in reverse repo transactions.

Among its top equity picks are Divi's Laboratories, Infosys, SBI, BHEL and Kansai Nerolac. It has recently added GE Shipping, Hanung Toys and Global Vectra to its portfolio.

The last fund to have come to the top list was Fidelity's India Special Situations Fund. Though its actual returns between June 14 and November 27 stood at 59%, its risk-adjusted return over the same period was 53%. This is a fairly large-sized fund with Rs 2,035.55 crore (Rs 20.355 billion) in assets under management.

Almost all its assets are invested in equities with just a marginal amount put into term deposits. Among the 72 stocks that make up its portfolio, 63 were new additions. Among its top picks are ICICI Bank, SBI, Satyam Computers, Bajaj Auto and Dr Reddy's. The common factor among the winners was the fact that they bet on the large caps, which have performed very well in the last six months.

Among the worst-performing schemes JM Emerging Leaders Fund managed the lowest position. As we said, the period belonged to emerged leaders, not emerging ones. The fund's actual returns stood at 15% but its risk-adjusted returns shrivelled to just 8%. With just Rs 55.61 crore (Rs 556.1 million) in assets under management, it has a 73% exposure to equities with the balance 24% in money market instruments.

The fund has added 19 new stocks to its portfolio in the last one month which include Apollo Tyres, GE Shipping, India Cements and Mahindra & Mahindra among others, while its top three picks are BHEL, Sterlite Industries and Dr Reddy's. Are these emerging leaders?

A list of losers without UTI would really be surprising. UTI Thematic Mid Cap Fund returned an actual 40% between June 14 and November 27 and had a risk- adjusted return of just around 19% over the same period. Of its Rs 88.16 crore (Rs 881.6 million) of net assets, 87% was invested in equities with the balance 13% in other current assets.

It has not added any new scrips to its portfolio and has concentrated 30% of its net assets in the top five holdings which include IVRCL Infrastructure, Thermax, Kalyani Steels, BEML and Gammon India.

Sahara Mid Cap is a tiny fund with just Rs 12.2 crore (Rs 122 million) in assets (when will SEBI weed out these funds?). Among the new stocks that it purchased out of this small amount were: Exide Industries, JHS Sevendgaard Laboratories and Accel Frontline; its top picks were TCS, Shree Digvijay Cement, Crompton Greaves, Aditya Birla Nuvo and Century Textiles. Its returns? On a risk-adjusted basis, it earned just 22% during the relevant period while its actual returns were 31%.

Taurus Bonanza's risk-adjusted return slumped to 23% against an actual return of 35%. It is a Rs 50.68 crore (Rs 506.8 million) fund with a 95% exposure to equity, 2% in debt and the balance 3% held in money market instruments. Among its top picks are Crompton Greaves, Jaiprakash Associates, BEML and Mahindra & Mahindra.

The last among equity diversified schemes to have a high risk profile vis-�-vis its returns is Principal's Dividend Yield Fund. While its actual returns between June 14 and November 27 stood at 26%, its risk-adjusted returns during the same period were 24%.

The scheme has Rs 200.73 crore (Rs 2.007 billion) in assets under management with 87% invested in equities and the balance 13% is carried in cash. Its top equity picks include ONGC, Cummins India, Tata Chemicals, Tamil Nadu Newsprint and Varun Shipping while it recently added Jay Shree Tea and BPCL to its portfolio.

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