1. Fund Rating is a purely quantitative measure of both returns and risk, which only gives a quick summary of how a fund has performed historically relative to its peers, and does not reflect its opinion of the future potential of any fund as it is not privy to the "future" portfolio mix of the fund manager.
2. For equity and hybrid funds, ratings for two time periods (3 and 5 years) are combined to give a single assessment of each fund’s risk rating vis-à-vis other funds in each fund category, while for debt funds, ratings are based on 18-month weekly risk-adjusted performance, relative to the other funds in the category.
3. Generally, therefore, there are no ratings done for an equity or hybrid fund with less than 3-year performance and a debt fund with less than 18-month performance track record, and in addition, each category must have 10 funds min., and each fund 5 Cr min. avg. AUM in past 6 months, for it to be rated, hence it is shown as "Unrated" till it achieves these qualifying parameters.
4. As regards the suitability of an "Unrated fund" for inclusion in one's portfolio as a starting point, instead of monitoring its "current" performance in isolation, its comparison over different time frames with category peers, along with its expense ratio, credit quality and fund style, is more apt, with closer monitoring till it gets rated.
5. Once a fund gets rated, it can be even better judged by comparing the following statistical values of its category peers, instead of its returns alone:-
a) Standard Deviation - lower being more stable, hence less risky,
b) Alpha - the more positive, the better it is,
c) Beta - less than 1 means less volatile, so better for conservative investors, and vice versa,
d) Sharpe and Sortino Ratios - higher being better towards risk-adjusted performance, and
e) Expense Ratio - the lower, the better it is.
6. We should also keep in mind that:-
a) Performance slippage of most funds is gradual.
b) Any rating system avoids radical changes by considering the long-term history of funds.
c) A fund or its rating does not "guarantee" any performance, which is always market-driven.
d) Fund rating merely reflects its past market navigation, vis-a-vis others in its category.
e) A fund's return can be negative too, irrespective of its rating.
2. For equity and hybrid funds, ratings for two time periods (3 and 5 years) are combined to give a single assessment of each fund’s risk rating vis-à-vis other funds in each fund category, while for debt funds, ratings are based on 18-month weekly risk-adjusted performance, relative to the other funds in the category.
3. Generally, therefore, there are no ratings done for an equity or hybrid fund with less than 3-year performance and a debt fund with less than 18-month performance track record, and in addition, each category must have 10 funds min., and each fund 5 Cr min. avg. AUM in past 6 months, for it to be rated, hence it is shown as "Unrated" till it achieves these qualifying parameters.
4. As regards the suitability of an "Unrated fund" for inclusion in one's portfolio as a starting point, instead of monitoring its "current" performance in isolation, its comparison over different time frames with category peers, along with its expense ratio, credit quality and fund style, is more apt, with closer monitoring till it gets rated.
5. Once a fund gets rated, it can be even better judged by comparing the following statistical values of its category peers, instead of its returns alone:-
a) Standard Deviation - lower being more stable, hence less risky,
b) Alpha - the more positive, the better it is,
c) Beta - less than 1 means less volatile, so better for conservative investors, and vice versa,
d) Sharpe and Sortino Ratios - higher being better towards risk-adjusted performance, and
e) Expense Ratio - the lower, the better it is.
6. We should also keep in mind that:-
a) Performance slippage of most funds is gradual.
b) Any rating system avoids radical changes by considering the long-term history of funds.
c) A fund or its rating does not "guarantee" any performance, which is always market-driven.
d) Fund rating merely reflects its past market navigation, vis-a-vis others in its category.
e) A fund's return can be negative too, irrespective of its rating.