Mutual Fund Rating: Introduction

There are around 4,000 mutual fund schemes in India competing to yield significant returns. It is a challenging task to sort out the perfect scheme for a particular investor, taking into account multiple factors like historical returns, risk exposure, financial objective, etc. To make it a little easy for investors to pick the right fund for themselves, many financial firms in India, like CRISIL and Value Research, rate the schemes based on various parameters.

A mutual fund rating measures a scheme’s historical risk-adjusted performance, over a period of time involving multiple business cycles, and compares its returns with that of its peers and benchmark.

What is Value Research Mutual Fund Rating?

Value Research is India’s leading investment research firm that provides in-depth analysis, advise and data related to financial markets. It also assesses the numerous mutual fund schemes in India, provides real-time data of annualized returns and risk and also rates them based on various parameters.

Value Research Mutual Fund Rating also known as Risk-Adjusted Rating is a measure of both risks and returns of mutual funds in India. It is a metric based on quantitative factors without any subjective component in play.

The overall rating is derived by subtracting the fund’s Risk Score from its Return Score. Accordingly, the funds are given star ratings, with 5-star being awarded to the top 10% of the funds, and 1-star being awarded to the bottom 10% funds.
It basically gives an overview of the past performance of the fund, and doesn’t foretell the future  performance of the fund.

Value Research takes into account the past year returns and risk exposure of a fund to derive the overall rating of the fund.

For Equity and Hybrid Funds: Annualized returns for the time period of 3 and 5 years are merged to evaluate a fund’s historical performance in comparison to the other funds in the category and the benchmark.

For Debt Funds:
For debt funds, weekly adjusted returns of the past 18-months are considered and compared to funds from the same category.

Value Research’s Return Grade

It captures a fund’s risk-adjusted return compared to other funds from the same category. The returns are adjusted taking dividend, bonus and rights into consideration. Returns in a specific time frame are then compared to risk-free returns delivered in the same time-period. The final score is arrived by comparing fund returns with the average category returns.

Value Research’s Risk Grade

It measures a fund’s risk of loss. It not only includes the probability of an investor losing money, but also the possibility of an investor earning less than what s/he get from guaranteed investment.

To calculate a fund’s risk score, monthly/weekly returns are compared to monthly risk-free return for equity and hybrid funds and weekly risk-free returns from debt funds. Risk-free return refer to the State Bank’s 45-180 days Term Deposit Rate. The overall performance with regard to the aforementioned parameters is then expressed as risk score.

What is CRISIL Mutual Fund Rating ?

CRISIL is a global credit rating agency that assess various financial instruments and offers a range of financial services. Its mutual fund rating gives a rough idea about how a particular scheme is going to perform in the near future.

The ranking is used by several financial intermediaries, asset management companies and retail investors as a benchmark for financial decision-making.

How Does CRISIL rank Mutual Funds?

Unlike other mutual fund rating agencies that rates mutual funds on the basis of Net Asset Value (NAV), CRISIL’s rating methodology of Mutual Funds is based on  evaluation of certain parameters such as historical returns, asset allocation, sectoral allocation, liquidity, and asset quality.

The top 10% of the funds get a 5-star rating, with their ranking being No. 1. And the bottom 10% of the funds are ranked the lowest with 1-star ratings.

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