Value Research Fund Rating (Risk-adjusted Rating) is a convenient composite measure of both returns and risk.
It is purely quantitative and there is no subjective component to the Fund Rating. The assessment does not reflect Value Research's opinion of the future potential of any fund.
It only gives a quick summary of how a fund has performed historically relative to its peers.
How Funds are Rated?
For equity and hybrid funds, the Fund Ratings for the two time periods (3 and 5 years) are combined to give a single assessment of each fundís risk rating vis-ŗ-vis other funds in each fund category.
For debt funds, the Fund Ratings are based on 18-month weekly risk-adjusted performance, relative to the other funds in category.
Value Research does not rate an equity or hybrid fund with less than 3-year performance and a debt fund with less than 18-month performance track record.
Each category must have a minimum of 10 funds for it to be rated. Effective, July 2008, we have put an additional qualifying criteria, whereby a fund with less than Rs 5 crore of average AUM in the past six months will not be eligible for rating.
Value Research Fund Risk Grade
The Value Research Fund Risk Grade captures the fundís risk of loss.
Fund Risk Grade is different from the conventional risk and volatility measures like standard deviation and beta as it indicates only downside volatility.
The latter refers to absolute losses and even periods when the fund underperforms a risk-free guaranteed investment.
The rationale: you can always get a guaranteed return by investing in a risk-free guaranteed investment like a bank term-deposit.
The risk of investing in a mutual fund not only includes the possibility of losing money, but also the chance of earning less than you would have on a guaranteed investment.
To calculate Fund Risk, monthly/weekly fund returns are compared against the monthly risk-free return for equity and hybrid funds and weekly risk-free return for debt funds.
Risk-free return is defined as State Bankís 45-180 days Term Deposit Rate.
For all months/weeks the fund has underperformed the risk-free return, the magnitude of underperformance is added.
This helps us to arrive at the average underperformance and how the fund has performed vis-ŗ-vis its category average.
The relative performance of the fund is expressed as a risk score.
The risk score of a fund is then assigned according to the following distribution :
Value Research Fund Return Grade
The Value Research Fund Return Grade captures a fundís risk-adjusted return in comparison to other funds in the category.
The returns though adjusted for dividend, bonus or rights, are not adjusted for loads.
The fundís monthly/weekly return is compared with the monthly/weekly risk-free return to arrive at the fundís total return in excess of the risk-free return.
The monthly average risk-adjusted return is compared with the average category return to arrive at the final score.
In case of a negative category average return, the risk-free return is used as benchmark.
A score in excess of one indicates that the fund has performed better than its category average and vice-versa.
The return score of a fund is then assigned according to the following distribution :
Value Research Fund Rating
The Value Research Fund Rating (Risk-adjusted Rating) is determined by subtracting the fundís Risk Score from its Return Score.
The resulting number is then assigned according to the following distribution :