Investors often rely on ratings when choosing mutual fund schemes due to the overwhelming number of options available in the industry. With over 2,000 mutual fund schemes available, it can be challenging for investors to select one that aligns with their financial goals and objectives. It’s important to note that there are 16 different types of debt mutual funds, 11 types of equity mutual funds, and 6 types of hybrid funds, each with varying returns and risks.
These options cater to different investor profiles and return needs. However, the critical question remains: Should fund ratings be the primary factor in decision-making? Can a four—or five-star rating guarantee above-average returns?
What is mutual fund rating?
Many investors rely on fund ratings published by Morningstar, Value Research, and CRISIL Rating when making investment decisions. These ratings are typically based on a fund’s historical risk-adjusted performance over different time periods and are compared with other funds in the same category.
The ratings provide a combined assessment of both return and risk, reflecting the fund’s ability to generate returns at a given risk level. They are based on aggregated data from three-year, five-year, and ten-year periods to provide a single measure of risk-adjusted performance.
Once the ratings are calculated, stars are assigned based on the fund’s percentile ranking. For example, the top 10% of funds receive a 5-star rating, while the lowest 10% receive a 1-star rating. This approach offers a quick overview of a fund’s performance relative to others in its category.
Can a fund rating fail?
Every fund manager is prone to mistakes, which can occasionally lead to a decline in performance. Additionally, a highly performing fund manager may leave the company, potentially causing a 5-star-rated fund to lose its competitive advantage.
Conversely, a lower-rated fund can experience a shift in fortune. The fund company may revise its investment philosophy or procedures and hire an experienced fund manager with a track record of consistently generating good returns. This could potentially elevate a 1-star rated fund to a 5-star rating and vice versa.
So, what should be the course of action for the investors?
When considering an investment in a mutual fund, it’s important not to rely solely on the fund rating. It’s also essential to evaluate the competence and reliability of the fund manager and the fund house and the robustness of the internal investment methodology.
The fund rating should not be used as the sole criteria for selecting a fund but as a starting point for the investor’s research. In order to choose the most suitable fund, additional research is always necessary.
Below are the other factors that investors should check before buying mutual funds:
Factors to consider while selecting mutual funds
Investment Objective
Fund managers experience
Expense ratio and exit load of the mutual fund
Fund houses net assets
Performance against its peers
Time horizon and Investors risk tolerance
Conclusion
When choosing a mutual fund to invest in, relying solely on its rating is not advisable. However, a highly rated fund gives you a better chance of making a successful investment in a volatile market. The rating alone isn’t enough to truly gauge the quality of the investment. You must consider your specific needs. Are you looking for a short-term or long-term investment? Is liquidity more important than return? What level of risk are you comfortable with?
The list of conditions you consider can be as extensive or concise as you prefer, but mutual fund rankings are just one tool that can help you make informed investment decisions. It’s crucial to select mutual fund investments based on your individual needs.
What factors should you consider before selecting a mutual fund scheme? Should investors rely solely on ratings when buying mutual funds? Let’s explore other essential factors to consider before selecting a mutual fund scheme. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
