Fund Rating

Can you please explain the basis for rating various funds?
-Jayant Divekar

Value Research Fund Rating essentially assesses the risk-adjusted returns of funds. It is a convenient composite measure of both returns and risk. It is purely quantitative and there is no subjective component to the fund rating. It gives a quick summary of how a fund has performed historically relative to its peers.

The Rating is determined by subtracting the fund's Risk Score from its Return Score. The resulting number is then assigned a rating based on a distribution grid (see box). So your 5-star rated funds lie among the top 10 per cent performers.

We would also like to add a word of caution, the assessment of these ratings does not reflect Value Research's opinion of the future potential of any fund.

Value Research does not rate an equity or hybrid fund with less than 3-year performance and a debt fund with less than an 18-month performance track record. Each category must have a minimum of 10 funds for it to be rated.

«««««   Top 10% ««««   Next 22.5% «««   Middle 35% ««   Next 22.5% «   Bottom 10%

Given that there are 180 equity diversified funds to choose from, Value Research Fund rating facilitates an efficient fund selection. By looking only at the 5-star rated funds your universe of superior equity diversified funds is reduced to eight funds. Now, among these eight funds you can take your pick from an aggressive mid and small cap player to a more sedate large cap player with lower volatility of returns.

This article was originally published on July 19, 2007.