1. How are these funds rated?
The content on the Mutual Funds Section is prepared by Value Research.
Value Research Fund Rating (Risk-adjusted Rating) is a convenient composite measure of both returns and risk. It is purely quantitative and there is no subjective component to the Fund Rating. The assessment does not reflect Value Research's opinion of the future potential of any fund. It only gives a quick summary of how a fund has performed historically relative to its peers.
For equity and hybrid funds, the Fund Ratings for the two time periods (3 and 5 years) are combined to give a single assessment of each fundís risk rating vis-ŗ-vis other funds in each fund category. For debt funds, the Fund Ratings are based on 18-month weekly risk-adjusted performance, relative to the other funds in category.
Value Research does not rate an equity or hybrid fund with less than 3-year performance and a debt fund with less than 18-month performance track record. Each category must have a minimum of 10 funds for it to be rated.
2. How is Fund Risk Grade computed ?
The Value Research Fund Risk Grade captures the fundís risk of loss. Fund Risk Grade is different from the conventional risk and volatility measures like standard deviation and beta as it indicates only downside volatility. The latter refers to absolute losses and even periods when the fund underperforms a risk-free guaranteed investment. The rationale: you can always get a guaranteed return by investing in a risk-free guaranteed investment like a bank term-deposit. The risk of investing in a mutual fund not only includes the possibility of losing money, but also the chance of earning less than you would have on a guaranteed investment.
To calculate Fund Risk, monthly/weekly fund returns are compared against the monthly risk-free return for equity and hybrid funds and weekly risk-free return for debt funds. Risk-free return is defined as State Bankís 45-180 days Term Deposit Rate. For all months/weeks the fund has underperformed the risk-free return, the magnitude of underperformance is added. This helps us to arrive at the average underperformance and how the fund has performed vis-ŗ-vis its category average. The relative performance of the fund is expressed as a risk score.
The risk score of a fund is then assigned according to the following distribution :
|Above Average||Next 22.5%|
|Below Average||Next 22.5%|
3. How is Fund Return Grade calculated?
The Value Research Fund Return Grade captures a fundís risk-adjusted return in comparison to other funds in the category. The returns though adjusted for dividend, bonus or rights, are not adjusted for loads. The fundís monthly/weekly return is compared with the monthly/weekly risk-free return to arrive at the fundís total return in excess of the risk-free return. The monthly average risk-adjusted return is compared with the average category return to arrive at the final score. In case of a negative category average return, the risk-free return is used as benchmark. A score in excess of one indicates that the fund has performed better than its category average and vice-versa.
The return score of a fund is then assigned according to the following distribution :
|Above Average||Next 22.5%|
|Below Average||Next 22.5%|
4. What does the Fund Rating mean?
The Value Research Fund Rating (Risk-adjusted Rating) is determined by subtracting the fundís Risk Score from its Return Score. The resulting number is then assigned according to the following distribution:
5. How should you use Fund Ratings to construct a portfolio?
Fund Ratings tell how a fund has performed on a risk-adjusted basis relative to a relevant category in the past. That is a useful piece of information, but it's not enough for smart investment decision. Fund Rating is a good starting point for a fund evaluation.
An optimal portfolio will not necessarily feature only four and five star funds. An investor needs to consider other factors such as risk tolerance, how the various funds in the portfolio may work together and appropriate diversification across asset classes. It may be that a particular fund, which currently has a two Star Rating, is the best choice for a portion of an investor's portfolio. An investor should contact their investment advisor for further assistance with these types of portfolio decisions.
6. How often are the ratings calculated?
Once a month.
7. Does Value Research charge fund companies to rate their funds?
No. Value Research does not charge fund companies to rate their funds or use the ratings.
Funds are rated based on their performance relative to other funds in their category.
8. What are the categories of funds for which Value Research does not provide a rating?
By definition, the Specialty equity or debt funds are those funds that do not fit neatly into one of the other categories. They are not directly comparable. For example, this category includes a specialty equity fund e.g. an MNC fund or specialty debt fund e.g. fixed maturity plans, which do not form a homogeneous group. Therefore, it would not make sense to compare them to each other and calculate a Star Rating on that basis. Also fund are not rated if they do not disclose their NAV regularly. All other categories are eligible for rating.
9. Are management fees considered when rating funds?
Yes, the Star Ratings are calculated on the returns a fund earns after management fees. There is no other special consideration of fees.
10. I just looked at the rating and realized a fund I own only receives two stars. Should I sell this fund?
Not necessarily. The Star Rating is a decent first screen for mutual funds, but it is only an introduction to a fund, not a conclusion. The rating is an evaluation of the past, not a prediction of the future.
11. Why did a fund lose a star? Or why did a Star Rating change?
It' s based purely on mathematics. A fund's Star Rating is based solely on a formula that Value Research recalculates each month - there is no subjective input. The loss of a star doesn't mean someone at Value Research has downgraded the fund - it simply means the fund's relative performance is currently below the cut-off point for its previous rating.
12. What should I do if a fund I invest in does lose a star?
The fact that a fund has earned a lower Star Rating is not necessarily a signal that it needs to be sold out of your portfolio. It is an indication that the fund may bear closer monitoring over the near term.