Are MF schemes with star ratings better?

India Infoline News Service | Mumbai | July 30, 2017 09:16 IST

Mutual fund investors always find it a challenging task to choose a mutual fund scheme that is suitable for their needs and goals and also which is high on performance.

Mutual fund investors always find it a challenging task to choose a mutual fund scheme that is suitable for their needs and goals and also which is high on performance.

While the suitability of a scheme in terms of financial goals and risk profile is important, the performance of the scheme is crucial for achieving the financial goals. The barrage of information coming in from different sources relating to the performance of various MF schemes perplexes the investors more. So what is the option?

One option could be to go for schemes having high star ratings, say, 5-star or 4-star ratings from rating agencies and reputed mutual fund sites. But are the ratings by rating agencies and MF websites reliable enough? That is a big question. This is because not all rating agencies and firms may rate any given MF scheme with the same or equivalent rating.

That is, a rating agency A may rate a MF scheme with a 5-star, while another rating firm may rate the same scheme 4-star and yet another agency may rate it as 3-star. The difference in ratings arises due to the different methodologies adopted by the various rating firms.

Most of the ratings are given based on quantitative parameters such as absolute returns, risk-adjusted returns, size of the corpus, portfolio turnover, among others. The agencies assign different weightages to different parameters, due to which the ratings differ. More importantly, since the qualitative parameters such as fund manager’s experience and his past track record of fund management, number of schemes managed by each fund manager, investment philosophy and investment approach, systems and processes followed by the MF house are usually not considered by the rating agencies, the ratings may not reflect the true worth and potential of the scheme.

The result is that different ratings by various rating agencies for the same MF scheme creates more confusion in the minds of the investorsand he may be at a loss to know which agency he should believe in and which one he should not.

Hence, instead of going by the star ratings of the MF schemes, it is worthwhile to do a need-based analysis of the MF scheme based on one’s financial goals and risk appetite before investing in any MF scheme.

Disclaimer: The contents herein is specifically prepared by ‘Dalal Street Investment Journal’, and is for your information & personal consumption only. India Infoline Limited or Dalal Street Investment Journal do not guarantee the accuracy, correctness, completeness or reliability of information contained herein and shall not be held responsible.

 

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