I have been investing in Mutual Funds for the past 2 years using the Value Research 5 star and 4 star ratings as a basis. I have noticed that a 5 star rated fund like HDFC Equity is ranked in the bottom half: HDFC Equity ranks 103/162 in the 1 year rank category. I am confused in relation to the ranks (1 year, 2 years, etc) and the ratings (4 star, 5 star, etc).
I also request your guidance on the following:
· Do you consider the fund's performance over the past 1-2 years when you rate the fund as a 4 or 5 star fund?
· Do you think there is a high probability of getting 15% returns if I continue to invest in 5 star and 4 star rated funds?
· Should I track a 5 star or 4 star fund for a particular period of time before investing in it?
· Please give your views on ICICI Prudential Tax Plan. This fund has not been performing well compared to other tax planning funds. Should I switch over to Magnum Tax Gain?
Fund ratings and Star Ratings are two different concepts. Both of these are computed differently and cannot be related.
Fund Ranking is a technical concept that changes on a daily basis according to the change in NAV of the fund. The trailing returns that you see on the Snapshot page of a fund are the returns generated by the fund in the last one year and not exactly in a particular calendar year. For the returns generated by a fund in the past years, on a year to year basis, one can refer to the Annual Returns section under the Performance tab.
Fund Ratings at Value Research are a composite measure of both risk and returns. Before arriving at the rating, we take into account essential factors like the past 3-5 years of a fund performance versus the peers and the category averages. We also compare the return with a risk free return. These ratings are generated through a complex assessment system which considers various factors and not just the past one year performance.
For years now, these ratings are trusted by investors and have helped them take informed investment decisions.
To know in detail how these ratings are calculated - Click Here
Talking about future returns is always a tough job, as it's almost impossible to do so. But if you remain invested in well performing equity diversified mutual funds with a long term view, you can expect an annual return in the range of 15-20 per cent.
The ICICI Prudential Tax Plan is a relatively new ELSS Fund and has been a poor performer of late. There are some better Tax Saving funds like SBI Magnum Tax Gain and HDFC Tax Saver where you can consider investing.