Should you worry if Crisil rank for a mutual fund scheme changes?
This article is based on a request from reader ( Suman Deb ) that if a Crisil rank for a mutual fund scheme changes, what does this mean for an investor and whether an investor need to worry about this?
What are Crisil Rankings for a mutual fund?
Crisil, an independent credit rating agency ranks equity, mutual funds and fixed income securities of various companies. We would limit our discussion here for mutual fund rankings. Crisil ranks mutual funds based on certain parameters. Hence it is important for us to know how the rankings would get changed, and as an investor whether we should worry about such change in rankings.
How Crisil ranks mutual funds?
Crisil ranks mutual funds based on various parameters. It would rank different categories of mutual funds in different ways. For the purpose of Crisil ranking, mutual funds are categorized into 4 broad categories
1) Short term income fund, ultra short term debt fund and Liquid funds: Crisil ranks these mutual funds with Mean return%, Standard deviation, company/sector concentration, Debt quality and debt liquidity.
2) Consistent performers in the last 5 years : Superior returns score and historical Crisil fund ratings would be considered by Crisil in ranking these mutual funds.
3) Index Funds : Crisil ranks these index mutual funds based on tracking error. Index funds track the underlying stocks of an Index. Any gap between the index funds performance Vs the underlying stocks of an index is termed as tracking error. The lower the tracking error, the higher the ranking would be.
4) All other equity mutual funds, ELSS and balanced mutual funds : Superior return score (SRS), company/sector concentration and liquidity is considered by Crisil to rank such mutual funds. SRS weight age would be 75% while others carry 25% weight age.
What is the Superior return score (SRS)
Majority of the weight age is given to SRS to rank the equity, ELSS and balanced mutual funds. SRS is the relative measure of schemes returns and the risk (volatility) compared to its peer group. The basis would be considering 3 years (36 months) returns. The weight age is grouped into four quarters i.e. 9 months each. Each nine-month quartile has a progressive weighting starting from the latest period: 32.5%, 27.5%, 22.5% and 17.5%, respectively. This means, latest performance is given more weight age than the past performance.
In case of consistent mutual fund scheme performers (for equity, balanced and debt categories), the SRS is calculated for a period of five years, with each one year period being weighted progressively with the most recent period having the highest weight age.
How does Crisil do final ranking based on these parameters?
Based on above weight ages, Crisil ranks from 1 to 5.
- Crisil-1-Very Good performance in the category (1 st to 10 th percentile)
- Crisil-2-Good performance in the category (11 th to 30 th percentile)
- Crisil-3-Average performance in the category (31 st to 70 th percentile)
- Crisil-4-Below average performance in the category (71 st to 90 th percentile)
- Crisil-5-Relative weak performance in the category (91 st to 100 th percentile)
Also read: Best Short term investment options
Well, if Crisil rank for a mutual fund scheme changes, what should an investor do?
This is where most of the investors worry. Should we sell of our mutual fund holdings if Crisil Rank-1 mutual fund scheme changes to Rank-2?
Downgrade of rank : If there is any downgrade of Crisil rankings, it does not mean that mutual fund scheme has become bad or weak. It only indicates that it is performing lower than its peers hence the ranking is reduced by Crisil.
Should we sell mutual funds units where the rank is downgraded: The decision would depend upon the Crisil rank movement. E.g. For a mutual fund scheme the rank has moved from Rank-1 to Rank-2, there may not be a panic situation. E.g. HDFC Top-200 mutual fund ranked well in the past. Currently it has Rank-2 position, however it is consistent performer. However there are better funds than this in terms of returns in the last few years, hence, the ranking for this scheme is Rank-2.
However the situation can be different if Crisil Rank-2 mutual fund scheme has moved to Rank-3. Means it moved from good performance to average performance. The situation would not have arrived due to market crash or economy downtrend. If this is the case, all other mutual fund schemes also would have underperformed. This is where you need to take a decision either to switch or sell of the mutual funds at appropriate time. Fresh investments should be strictly avoided even in case you want to do cost average by buying more units.
The other thought one of the reader (Due credit to Ravikumar Nama) gave is we can check mutual fund schemes research sites like valueresearchonline.com or fundsindia.com about the scheme before making a buy or sell decision instead of solely depending on the Crisil ranking changes. Thank you Ravi.
Conclusion thoughts: Crisil ranking methodology gives a good indication about a mutual fund. However the downgrading of ranking may not lead to panic situation and you need not sell the mutual fund units, unless the previous rankings were already low and it got downgraded still further.
Readers, I would invite your feedback on this article.
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Should you worry if Crisil rank for a mutual fund changed
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