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CRISIL Rating for Mutual Funds

Getting Started with CRISIL Rating for Mutual Funds

Credit rating agencies rank mutual funds based on various parameters. Rating plays a crucial role in determining the authenticity of the fund. In this article, let’s understand about Credit Rating Information Services of India Limited (CRISIL) rating for mutual funds.

What is CRISIL Rating for Mutual Fund?

CRISIL rating for mutual fund allows investors to compare and evaluate the best performing funds in the market at a given point of time. The agency evaluates mutual funds on two parameters that include qualitative and quantitative. These ratings are not just useful for investors; it is also beneficial for asset management companies and intermediaries that allows them to offer the best scheme to prospective investors. The Securities and Exchange Board of India (SEBI) regulates all the rating agencies, including CRISIL.

The CRISIL Mutual Fund Ranking (CMFR) which rates equity, debt and hybrid fund schemes based on global practices. Below is the three-basic criterion for ranking:

  • Three/one-year Net Asset Value (NAV)

  • Assets under management (AUM) in the excess category of cut-off limits - (AUM indicates the size and success of a fund house)

  • Complete Portfolio disclosure

Eligibility Criteria for Mutual Fund Rating:

  • Ratings are given only to open-ended mutual funds

  • NAV includes three-year and one-year mutual funds – Three-years in case of dynamic, medium to long, equity, hybrid, gilt, and medium duration funds. One-year NAV for Arbitrage, corporate funds, short-duration funds (liquid funds), funds of banking or PSU sector and credit risk funds

  • Equities with AUM cut-offs of Rs. 10 crores, Debt and Hybrid with AUM cut-off of Rs. 50 Crores and Debt funds (of less than one-year maturity including money market, ultra-short-term, & liquid funds) should have AUM cut-off of Rs. 250 crores

  • Portfolio disclosure for three years in the last quarter

Parameters of CRISIL rating for Mutual funds:

  • Portfolio Concentration Analysis:

    This involves the risks faced due to improper or over-diversification. For debt funds, the concentration is analysed at the individual level, while the diversification score analyses the industry and company concentration.

  • Liquidity Analysis:

    Using this parameter, the rating agency measures the liquidity level of a mutual fund scheme. CRISIL takes into consideration the portfolio liquidity score for the past three months.

    In case of corporate debt funds, the agency classifies the security into categories including semi-liquid and illiquid. The agency analyses fund’s liquidity based on the exposure of the scheme to these categories. A low score means more liquidity.

  • Mean Return and Volatility:

    CRISIL uses mean returns to determine the average daily returns of the fund’s NAV, while volatility helps to know the deviation of the returns. As mentioned in the eligibility criterion, the period of the analysis is three-years for equity hybrid & debt fund. At the same time, it is one year for corporate bonds, credit risk, PSUs and other short-duration categories.

  • Active Return:

    CMFR (CRISIL Mutual Fund Ranking) incorporates this parameter for equity fund categories that include mid-cap, large-cap, multi-cap, large and mid-cap and focused and value/contra funds. The active returns are the percentage of loss or profits made by an investment portfolio as a result of active investment decisions by the fund manager.

  • Tracking Error:

    This measures the variations of a scheme’s performance by comparing it with the index that it tracks. CRISIL uses this factor for index schemes. A low tracking error indicates a better performing scheme.

  • Count of negative returns:

    This parameter is mainly used for arbitrage mutual funds, wherein the agency measures the downside risks of the funds.

  • Exposure to the sensitive sector:

    The CRISIL Mutual Fund Ranking analyses the risk factor of fund schemes depending on industry risk scores (IRS) for various sectors. The score assesses the credit risk associated with the industry on a uniform scale. IRS captures the industry influence on the repayment ability of the companies.

How the CRISIL Mutual Fund Ranking helps investors?

The credit score of the mutual funds helps to make investment decisions. The score allows investors to decide when to buy, sell or hold a mutual fund unit. A high credit rating indicates the credibility of a unit, as well as lets the investors know risks associated with it.

How CRISIL ranks mutual funds?

CRISIL Mutual Fund Ranking includes ranking for different funds such as debt, equity, and hybrid category. CRISIL uses portfolio-based attributes and NAV of the fund to rank the funds. The agency ranks mutual funds from a scale of 1 to 5. In each category, CRISIL ranks top 10 percentile for funds under rank 1, while the top 20 percentile falls under rank 2.

Before investing in mutual funds, note that CRISIL rating should not be the only deciding factor for investment. You can use the score as a large filter to identify the quality & the overall health of a mutual fund scheme.