1. Typically, ratings are based on a scheme’s past performance, based on objective factors, i.e. what could be quantified, mostly on a risk-adjusted basis.
2. Some ratings, however, also take into account subjective factors, like the track record of the fund manager, investment process of the fund house, etc.
3. Although ratings take into account the kind of risks the scheme has taken, but it does not always go into the portfolio mix to give an opinion about the risks that could arise in future.
4. So most fund ratings should be used as the starting point for researching more about them, and should not be the only benchmark to accept or reject a fund.
5. Having said that, if the ratings of your funds have gone down continuously over all the quarters of a year, when compared to their peer schemes, it may be a good time for reviewing them, over similar periods, to weed them out (no point in rebalancing them like stock averaging) for better funds from its peers, keeping in mind your overall asset allocation and risk profile.
6. It also helps to keep in mind that:-
a) The performance slippage of most funds is not sudden, but gradual.
b) Any rating system is devised in such a way that it does not change radically, as the fund’s long-term history is also taken into account.
c) A mutual fund can turn mediocre, and there is no guarantee of it replicating its good performance, as it is a market-related instrument and is bound to undergo a change.
d) The fund rating is a relative measure, which shows how well a fund has managed to navigate the market’s ups and downs, to give a return higher than others in its category, even if it is negative at times.
e) The ratings should, therefore, be used as a good starting point, but not as a conclusive parameter, and any slippage or upgrade should be used thereafter as a pointer to keep a watch on the fund's performance.
2. Some ratings, however, also take into account subjective factors, like the track record of the fund manager, investment process of the fund house, etc.
3. Although ratings take into account the kind of risks the scheme has taken, but it does not always go into the portfolio mix to give an opinion about the risks that could arise in future.
4. So most fund ratings should be used as the starting point for researching more about them, and should not be the only benchmark to accept or reject a fund.
5. Having said that, if the ratings of your funds have gone down continuously over all the quarters of a year, when compared to their peer schemes, it may be a good time for reviewing them, over similar periods, to weed them out (no point in rebalancing them like stock averaging) for better funds from its peers, keeping in mind your overall asset allocation and risk profile.
6. It also helps to keep in mind that:-
a) The performance slippage of most funds is not sudden, but gradual.
b) Any rating system is devised in such a way that it does not change radically, as the fund’s long-term history is also taken into account.
c) A mutual fund can turn mediocre, and there is no guarantee of it replicating its good performance, as it is a market-related instrument and is bound to undergo a change.
d) The fund rating is a relative measure, which shows how well a fund has managed to navigate the market’s ups and downs, to give a return higher than others in its category, even if it is negative at times.
e) The ratings should, therefore, be used as a good starting point, but not as a conclusive parameter, and any slippage or upgrade should be used thereafter as a pointer to keep a watch on the fund's performance.