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Just like CIBIL assesses the creditworthiness of individuals, CRISIL does the same for mutual fund companies. In this article, we will cover the following aspects of this internationally accepted rating agency.

  1. What is CRISIL?
  2. Parameters used by CRISIL to rate mutual funds
  3. How does CRISIL rank mutual funds?
  4. What does CRISIL star-ratings imply?
  5. How can an investor use CRISIL rank to select a fund?

 

1. Credit Rating Information Services of India

CRISIL is a global credit rating agency for financial institutes and
financial instruments. The Credit Rating Information Services of India Limited offers a myriad of financial services. This rating shows how likely a particular mutual fund is going to deliver the returns on time and within the policy framework. They enjoy high acknowledgment among investors, intermediaries and fund houses for mutual fund analysis and ratings.

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2. CRISIL Parameters to Rate Mutual Funds

CRISIL ratings for mutual funds disclose all the variables in their rating methodology description. They only rate open-ended schemes and they rank mutual funds based on a set of parameters as listed below.

a. Superior Return Score (SRS)

SRS denotes the fund’s returns and risks in comparison with similar other portfolios. Example, you cannot compare a large-cap fund with a mid-cap fund. The only apple to apple comparison works here.

b. Portfolio Concentration Analysis

Concentration, here, means the risks faced due to over-diversification. For example, if one invests in too many funds just to diversify the portfolio, you might end up having similar stocks, which defeats the purpose.

c. Mean Return & Volatility

CRISIL only considers mean return and volatility for equity funds, short-term debt funds and credit opportunities funds. Mean return is the average daily returns based on the NAV, while volatility is the degree of fluctuations in returns.

d. Quality of Assets

Asset quality calculates the possibility of default by the debt security issuer to honor the timely debt repayment.

e. Exposure to Sensitive Sector

For debt funds, CRISIL takes industry risks into account and give the fund an Industry Risk Score (IRS). This score analyzes the effect of different variables on industry and the debt repayment capacity of organizations in a given time horizon.

f. Liquidity Analysis (LA)

It assesses the ease with which a fund house can liquidate a portfolio. The lower the score, the more liquid the fund is. For instance, the LA of equity funds is based on the number of days it takes to liquidate the portfolio.

g. Tracking Error

Index funds use this parameter to estimate how much a fund’s performance can fluctuate regarding the index that it tracks. A lower tracking error is a positive indicator.

CRISIL

3. How CRISIL ranks Mutual Funds

While most ranking models use either returns or net asset value (NAV) for the purpose, CMFR evaluates both NAV and portfolio-based attributes. This presents a single point analysis of mutual funds by considering the quality of the asset, risk-adjusted returns, liquidity, and asset concentration.

The rating agency assigns ranks or star-ratings to mutual funds on a scale of 1 to 5. For instance, CRISIL Fund Rank 1 indicates ‘very good performance’ – top 10 percentile of funds in any peer group. The next 20 percentile falls under CRISIL Fund Rank 2.

4. CRISIL Rating from 1-star to 5-star

CRISIL’s ratings are based on different time frames, namely 3 years, 5 years or 10 years. Combinations of these timelines give a single measure of risk-adjusted performance of a fund. After calculating the ratings, the agency sets stars to these funds as per their respective percentiles.

While the top 10% funds get 5-star ratings, the bottom 10% funds are slapped with a 1-star rating. The rating is a composite measure of both return and risk, which helps one figure out the ability of the funds to deliver returns, even with risks involved.

Examples of how CRISIL Rates different Mutual Funds:

 

Equity

Debt

Hybrid

Money Market

TATA Equity PE Fund- Rank 1 Franklin India Low Duration Fund- Rank 1 HDFC Balanced Fund- Rank 1 Indiabulls Liquid Fund- Rank 1
DSP BlackRock Opportunities Fund- Rank 2 BOI AXA Corporate Credit Spectrum- Rank 2 DSP BlackRock Balanced Fund- Rank 2 Axis Liquid Fund- Rank- 2

 

5. CRISIL Rating – what it means to investors

CRISIL rating is highly reliable if you seek an elaborate and thorough rating practice because they check every variable possible. This is why many fund houses use CRISIL ranking as one of their USPs. However, this rating will not point you towards a fund with more return potential.

Ratings alone cannot be performance indicators, thanks to the unpredictable market fluctuations. So, it would be a good idea to look at other assessment metrics. If you think the entire process cumbersome,  you can check out our well-researched and hand-picked mutual funds. These are selected from the top fund houses in the country based on CRISIL, past performance, liquidity and Sharpe Ratio among other metrics.

 

In short, CRISIL’s reputation for unbiased ratings and benchmarks made it a premier and globally recognized rating agency. No wonder many seasoned investors, as well as first-timers, choose to check the ratings and ranks before choosing a mutual fund.

 

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