How we score a fund — the five parameters, in four minutes.

Transcript

0:00 Every fund on the Third Rock Wealth screener carries a single number from zero to five. That number is the Third Rock Wealth Score, and it’s our research desk’s composite assessment of fund quality. The score is not five separate parameters added up. It’s a single composite, broken into its parts so you can see what drove it. The five parameters are the components, weighted, of one verdict.

0:32 The first parameter is performance — specifically, how well a fund has been rewarded for the risk it took. For an equity fund, that means sustained outperformance of its benchmark across a full market cycle. Not a single year, not a single quarter. A fund that doubled in 2021 and gave it back in 2022 scores worse than a fund that beat its benchmark by three points every year for five years.

1:18 Second — risk management. How much of a market fall the fund captures. Equity funds that lose less when the market loses are worth more, all else equal, than funds that fall as much as the index but rise faster. The number we use is the down-capture ratio, computed over a full market cycle that includes at least one drawdown of more than fifteen per cent.

2:04 Third — consistency. Whether a fund does what it’s meant to, again and again. For equity funds, we look at the percentage of rolling three-year windows where the fund beat its benchmark. A fund that beats its benchmark in seventy per cent of rolling windows is more consistent than one that beats it in fifty. Consistency is also the parameter that separates a Q1 fund from a Q4 fund whose long-term average happens to look similar.

2:48 Fourth — manager quality. How long the current fund manager has been running this specific scheme. We weight this because the track record you’re evaluating belongs to the person still managing the money. A fund with a great five-year record under a manager who left six months ago is not the same fund anymore. For debt and hybrid funds, where a defined mandate matters more than any single manager, this parameter is deliberately weighted lighter.

3:24 Fifth — cost efficiency. The fund’s expense ratio benchmarked against what’s reasonable for its SEBI sub-category. A large-cap fund and a small-cap fund are held to different cost standards, because the underlying economics are different. Cost matters — one percentage point a year compounded for twenty years is roughly an eighteen per cent corpus difference — but it’s the smallest weighted component because cost alone doesn’t determine outcomes; it sets the floor.

3:52 What the score doesn’t know is your goals, your risk tolerance, your horizon, or your tax situation. A fund that scores 4.6 may not be the right fund for you. That’s why the score is the start of a conversation with your partner, not a recommendation by itself. The score tells you which funds clear a measurable bar. Which of those funds belong in your portfolio is a separate question, and one we don’t answer on a public surface.

4:00 Scores are recomputed every month from the research pipeline using data from AMFI, scheme documents, and AMC disclosures. The methodology is public. The composite weighting is published. You can verify any score from the underlying numbers, which is the way we think it should be.