Use Fund Ratings To Improve Your Portfolio Performance

BY HELPING YOU SELECT CONSISTENT PERFORMERS THAT HAVE GIVEN OPTIMAL RISKADJUSTED RETURNS, MUTUAL FUND RATINGS CAN GIVE YOU AN EDGE.

- Sudipta Mittu

Today, if you were to include all the variants available (standard, institutional, direct, regular, dividend, growth, reinvestment, etc), the number of mutual funds available in India runs into thousands. The task of choosing the right mutual fund for one’s portfolio has become perplexing. Merely going by historical returns may not be a good idea since they don’t tell you whether performance can be repeated. Today many investors rely on ratings of mutual funds to make the right choice. Ratings allow you to select funds that have outperformed their peers. By looking up a fund’s historical ratings, you can select one that has been consistent. Ratings also take into account funds’ risk-adjusted returns, and don’t evaluate them based on returns alone.

Qualitative versus quantitative ratings

Quantitative ratings of funds are based on historical performance. They are based on a number of parameters such as returns, risk, risk-adjusted returns, etc. Appropriate weights are given to each of these metrics and a final score is arrived at. Funds in the top 10 per cent get a five-star rating while those in the bottom 10 per cent get a one-star rating. Those in between get four-, three - and two-star ratings. 

Quantitative ratings only tell you how the fund has performed in the past. One doesn’t know if the performance was a mere flash in the pan or whether the fund manager can sustain it. That is why quantitative ratings need to be supplemented with a qualitative assessment of funds.