Good funds become laggards over a period of time.

When we rate funds, we take performance and risk into account. And accordingly, they get a star rating. The methodology is explained below.

Over here, we picked the funds that have shown an increase in their star-ratings by two or more stars over the last three years. The ratings for the month of October 2002 were compared with that of October 2005.

We only looked at open-ended funds in three categories:

1. Diversified equity: Funds that invest in the shares of companies of different sectors

2. Tax Planning: These Equity Linked Savings Schemes are diversified equity funds with a tax benefit

3. Hybrid - equity oriented: Balanced funds invest in both, equity and debt (fixed return investments). These are funds which have more than 50% of their total investments in equity.

The Net Asset Values and returns are as on November 16, 2005.

• How safe are mutual funds?

Here are six funds that made it to our list.

Birla Equity Plan

Category: ELSS
Current rating: 4 stars
NAV: 45.46
1-year return: 58.94%
Average 1-year return of funds in this category: 57.78%
3-year return: 72.70%
Average 3-year return of funds in this category: 59.01%

Canfortune '94

Category: Diversified equity
Current rating: 4 stars
NAV: 24.81
1-year return: 55.35%
Average 1-year return of funds in this category: 52.02%
3-year return: 60.68%
Average 3-year return of funds in this category: 57.15%

Magnum Contra

Category: Diversified Equity
Current rating: 5 stars
NAV: 23.09
1-year return: 89.11%
Average 1-year return of funds in this category: 52.02%
3-year return: 81.95%
Average 3-year return of funds in this category: 57.15%

Canbalance II

Category: Balanced
Current rating: 4 stars
NAV: 25.07
1-year return: 43.18%
Average 1-year return of funds in this category: 34.90%
3-year return: 39.88%
Average 3-year return of funds in this category: 38.73%

DSPML Balanced

Category: Balanced
Current rating: 4 stars
NAV: 26.67
1-year return: 31.57%
Average 1-year return of funds in this category: 34.90%
3-year return: 42.43%
Average 3-year return of funds in this category: 38.73%

Kotak Balance

Category: Balanced
Current rating: 5 stars
NAV: 20.92
1-year return: 46.57%
Average 1-year return of funds in this category: 34.90%
3-year return: 42.55%
Average 3-year return of funds in this category: 38.73%

• How to compare mutual funds

How the funds are rated

The star rating is a quick and easy way to identify mutual funds that have produced strong risk-adjusted performances vis-a-vis their peers.

The funds with a 5-star rating are the best. Those with a 1-star rating are the worst.

But do note, 'Best' does not indicate the highest return when compared with the rest. It means you will get a good return without putting your money at too much risk.

A fund's return for each month is taken since the day it is launched.

This return is compared to other 'riskless' investments, like government investments, which have no risk per se. This means funds do not rate very high if they give phenomenal returns, but have taken tremendous risks to do so.

Only funds with a minimum performance history of three years are considered.