Mutual funds ratings

Mutual Fund is an investment that can either bring you great returns or leave you extremely
disappointed with very little to show in terms of returns. All these depend on the fund you choose and
the expertise of your fund manager. A mutual fund scheme has to be selected after a careful
consideration of all the factors that have a potential influence on the fund. It is very hard for one to
choose from the plethora of mutual fund options available in the market. In such cases, mutual fund
ratings are the best way to identify the right fund to suit your financial goals.

Mutual Fund Ratings - Benefits

Unlike insurance ratings, mutual fund ratings are not very common.Perhaps, the fact that mutual fund
per se is a new concept could provide a reasonable explanation for the existence of only a handful of
firms to rate mutual funds. Mutual Fund ratings have to be punctiliously reviewed before one selects a
fund. There are numerous benefits of a rating. For the investor, the information that the rating provides
is very useful in helping him/her take a sensible investment decision. The mutual fund rating provides
insights on the mutual fund in terms of its portfolio and it could offer you an unbiased view of the fund ?
s relative credit quality. Mutual fund ratings also provide valuable information about the quality of fund
management and the service.It is essential that you consider all these factors in order to meet your
specific investment goals.

The benefits of mutual fund ratings are not limited to investors alone. These ratings offer intermediaries
the information that they can use to counsel an investor who is looking to invest in mutual funds.With
these ratings, the intermediary can offer an informed suggestion to the investor. Moreover,
intermediaries can also offer those products that meet the return-risk preference of investors. Since the
information is not subjective, there is very little room for error in terms of matching an investor\'s
preference with the suitable fund. Additionally, these ratings can help an intermediary when he markets
a specific scheme. Ratings lend more credibility to the intermediary\'s claim.The intermediary can also
differentiate a rated scheme from another rated/unrated scheme. The rating would serve as the specific
fund\'s identity.
In addition to the above, a fund sponsor or an Asset Management Company (AMC) can also benefit from
mutual fund ratings.The ratings offer an unbiased independent-agency assessment of the schemes
offered by these companies. As earlier, these ratings also act as a marketing tool when a company is
offering various schemes. Investors would look for credibility in whatever investment they make and
these ratings are the ideal way to meet their requirements. Moreover, these ratings also act as a
benchmark to assess the performance of a specific mutual fund scheme.

Rating Agencies & Rating System

Although there are very few mutual fund rating agencies, the ones that currently offer these services are
extremely efficient in their assessment. One of the best rating agencies is Morningstar Mutual Fund
Ratings Agency.This agency has been in existence for over 15 years and currently offers excellent rating
services. The rating is typically based on a star system.The usual rating method can be understood from
the way this agency rates a fund.In Morningstar Mutual Fund Rating System, the fund is rated based on
its performance mapped with an assigned risk peer group.The fund can achieve stars between 1 and 5.

It might sound easy for you to pick a fund with the greatest number of stars. However, there are quite a
few factors that come into play. The rating is determined based on a fund\'s past performance.Stars are
assigned by plotting the score obtained by subtracting a fund\'s risk score from a return score. Funds
that have the highest risk adjusted return are usually the ones with the maximum stars. However, the
blip in the radar is that the rating system is based on the historical performance of the fund. It wouldn\'t
take a scientist\'s brain to understand that a fund\'s past performance doesn\'t determine its future
performance. And, this is one of the primary reasons for the disclaimer provided by AMCs that says
"past performance is not an indication of future performance and returns may vary.\'

Certain mutual funds specialize in specific industry verticals.These industry sectors might have done well
in the past and therefore, the fund also prospered. However, when the industry is not doing too well,
the fund will not offer you good returns.This glitch has made people reconsider their decisions taken
based on this rating system. A five star rating acquired through this system doesn\'t guarantee you in
anyway that the fund will do extremely well. However, one cannot completely disvalue this rating
system. It can act as one of the factors that you might want to consider while choosing a scheme or
researching a particular fund.
Self-Rating

A better way to rate a mutual fund is a self-evaluated rating system. You can decide which scheme to
opt for based on factors like the ability of the fund to meet your financial objective, the past returns of
the fund, volatility of the fund with the help of tools like Bear Market Rank and other information like
the mutual fund charges such as front loads, management fees and expense ratios.

Another method you can adopt is to juxtapose the rating with another matrix that includes information
such as inclusion of large capitalization stocks in the fund, inclusion of the portfolio of an industry
vertical that has witnessed a growth, etc. This information can help you look at the fund in a different
dimension.

When you invest in a mutual fund scheme, do not blindly select it based on the standard rating done by
agencies. Conduct an independent, informed rating yourself so that you can take a better decision.

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MUTUAL FUND RATINGS

ICRA’s Credit Risk rating is an analytical process characterised by both width and depth, and
following on the organisation’s extensive knowledge base encompassing almost every sector of
the Indian economy, besides the economy itself. Our goal in Credit Risk Rating of debt mutual
funds is to provide investors with a simple-to-use measure of credit risk. The Credit Risk Ratings
incorporate ICRA’s assessment of a debt fund’s published investment objectives and policies, its
management characteristics, and the creditworthiness of its investment portfolio.

ICRA’s analysts obtain and rely on relevant data from public and non-public sources. While this
data may vary according to the type and nature of the debt fund, the following information is
typically used in the Rating process:

Prospectus and related documents:

- Debt fund portfolio data, including periodic investor reports and public filings
- Industry surveys, studies, and special reports
- Internal documents describing the Asset Management Company’s (AMC’s) structure, 
  investment philosophy, decision making process, and performance track record

In addition, ICRA encourages continual dialogue with the AMC’s management. ICRA’s analysts
would normally meet the company representatives for a discussion of the relevant factors in
connection with the assignment of an initial Credit Risk Rating, and on a periodic basis thereafter.

ICRA’s Credit Matrix provides debt fund managers with investment decision flexibility. The Credit
Matrix is a tool used by ICRA to analyse the investment portfolios of debt mutual funds. The
analysis involves measuring a portfolio’s aggregate credit quality through a review of the credit
quality of each underlying debt security. A portfolio’s weighted average credit quality is then
measured against the appropriate benchmark credit score. Separate benchmark credit scores are
used for liquid and bond funds. Short-term debt funds have weighted average portfolio maturities
of up to one year and are typically liquid/cash funds. Long-term debt funds, on the other hand,
have weighted average maturity of more than one year and are typically bond funds. ICRA
benchmarks short-term debt funds including liquid/cash funds against a 12-month benchmark
credit score, while long-term debt funds are benchmarked against the long-term benchmark credit
score. ICRA generally assigns short-term MF Credit Risk Ratings to short-term/liquid funds, but
gives an option to these funds to seek long-term MF Credit Risk Rating. Similarly, ICRA generally
assigns long-term MF Credit Risk Ratings to bond funds, but gives an option to these funds with
weighted average maturity of less than 12 months to seek short-term MF Credit Risk Ratings.

The Benefits

For Investors, the Ratings:

- Facilitate informed investment decision making

- Provide independent and reliable opinion on: 
      - the relative credit quality of the portfolio 
      - the quality of the Fund’s management and operations
- Help meet specific investment objectives

For Intermediaries, the Ratings help to:

- Provide informed advice to investors

- Offer products matching the specific return-risk preferences of investors
- Enhance the marketability of various schemes
- Differentiate (using the ICRA Rating) the various Schemes from other
  Rated/non-Rated Schemes

For Fund Sponsors/AMCs, the Ratings:

- Provide an assessment made by an independent agency

- Serve as a marketing tool to differentiate a scheme from other available 
   schemes
- Help meet investors’ Rating requirements
- Provide for benchmarking of performance