- Mutual fund rating gives you an idea of how good or bad the fund has performed over different periods
- However, the future performance does not depend on the rating
When you hunt for a mutual fund, what do you look at? Returns, NAV, AUM, fund manager or something else? All these are important stuff to look at. But you can’t ignore the importance of rating at the same time. The rating tells you in many ways the quality of the mutual fund scheme you invest your hard earned money in. So, one must know the nitty-gritty of the mutual fund rating before putting your money. In this post, we will detail you on the rating and which will hopefully guide you towards choosing the right mutual fund to create wealth for the future.
How are Mutual Funds Rated?
Mutual funds are rated mostly on the performance of the fund over different periods. The rating also takes into account the fundamentals of the fund house, asset allocation of a scheme, the experience and credentials of a fund manager, returns based on inflation, besides several other parameters.
How Does the Asset Allocation Matter to Mutual Fund Rating?
Mutual funds earn based on how efficiently the money is distributed across financial instruments. So, the rating agencies can check the quality of these instruments that would basically be stocks, bonds, debentures, etc. Besides quality, the agencies will also look at the extent of fund exposure in these instruments before assigning a rating to a particular mutual fund scheme. If the quality and extent of exposure are found to be good, it would most likely result in a good rating of the fund.
How Does the Performance of Mutual Fund Scheme Influence Rating?
The performance of the mutual fund scheme is probably the biggest criteria for a rating agency. Depending on how the fund has performed over different periods, the agency will decide on the rating it should provide. The agency can analyze 3, 5 or 10-year performance of the mutual fund scheme before assigning a rating.
How Much Weightage Does the Fund Manager Have in Mutual Fund Rating?
Your mutual fund earnings depend on a great extent the fund manager the fund house has roped in for a particular scheme. The manager’s smart moves in picking the right stocks, bonds or other securities pave the way for capital appreciation, regular income generation or both in the best way possible. As the market is volatile in nature with unprecedented events (both good & bad) likely to surface from time to time, it is the understanding and the caliber of the fund manager that will sail your mutual fund investments through the turbulent times. He/she will read, understand and interpret the market data before taking a course of action. If the rating agency finds the role and credentials of a fund manager good, it can boost the rating of the fund he/she is at the helm of.
Rating Will Also Depend on How Good the Returns are in Line with Inflation
The returns may appear good when it is not adjusted to inflation. When the returns take inflation into account, how does it appear then? Yes, the returns would be lower. But it should be more than the inflation prevailing in the market. If that is the case, the scheme can be a head turner as far as rating is concerned.
A Look at the Mutual Fund Star Ratings
Mutual fund ratings are provided through 1 to 5 stars. Stars are decided on the basis of percentile in which the funds are placed in the order. Generally, 5-star is assigned to top 10% funds. On the other hand, the bottom 10% is given 1-star rating.
Mutual Fund Rating Agencies In India
There are a number of mutual rating agencies in India, such as CRISIL, ICRA, CARE, etc.
Does the Rating Indicate Future Performance?
The rating is clearly on the basis of past performance. And, it is by no means an indicator of what’s in store for an investor in the future. Yes, rating is important to look at. A 4 or 5-star rated fund may not perform up to the expectations in the future.
Disclaimer – “Mutual fund investments are subject to market risks. Please read the offer document carefully before investing”.