1. A fund's ratings are based on past performance as they have only factored in the kind of risks the scheme has already taken, and don’t guarantee future returns as it is not privy to the "future" portfolio mixes of a fund manager.
2. Its performance is not seen in isolation but is rated on the basis of how it performed relative to the other funds in the category, i.e. on the percentile score of the schemes, and changes over time depending on their percentile scores.
3. Ratings also work on a ‘one size fits all’ rule, and don’t tell whether a scheme is suitable for an aggressive or a conservative investor, and at best, can serve as a starting point for initial screening to identify a broader set of funds.
4. Thereafter, an investor should also understand the risk-reward profile of a mutual fund by comparing the following statistical values of its category peers (readily available in popular aggregator websites):-
a) Standard Deviation - lower being more stable, hence less risky,
b) Alpha - the more positive, the better it is,
c) Beta - less than 1 indicates less volatility, hence better for conservative investors, and vice versa, and
d) Sharpe and Sortino Ratios - higher being better towards risk-adjusted performance.
5. As a thumb rule, if a fund's rating has been revised downwards continuously over all the quarters of a year, when strictly compared to its peer schemes, it may be a good time for reviewing and weeding it out (no point in re-balancing them like stock averaging) for a better fund from its peers, keeping in mind your overall asset allocation and risk profile.
2. Its performance is not seen in isolation but is rated on the basis of how it performed relative to the other funds in the category, i.e. on the percentile score of the schemes, and changes over time depending on their percentile scores.
3. Ratings also work on a ‘one size fits all’ rule, and don’t tell whether a scheme is suitable for an aggressive or a conservative investor, and at best, can serve as a starting point for initial screening to identify a broader set of funds.
4. Thereafter, an investor should also understand the risk-reward profile of a mutual fund by comparing the following statistical values of its category peers (readily available in popular aggregator websites):-
a) Standard Deviation - lower being more stable, hence less risky,
b) Alpha - the more positive, the better it is,
c) Beta - less than 1 indicates less volatility, hence better for conservative investors, and vice versa, and
d) Sharpe and Sortino Ratios - higher being better towards risk-adjusted performance.
5. As a thumb rule, if a fund's rating has been revised downwards continuously over all the quarters of a year, when strictly compared to its peer schemes, it may be a good time for reviewing and weeding it out (no point in re-balancing them like stock averaging) for a better fund from its peers, keeping in mind your overall asset allocation and risk profile.