If there is one thing certain about the fund ratings done by Value Research, it is the complete objectivity of it. It is completely free of cost to the investors and is not sponsored by any asset management company (AMC). While AMCs do not request us to rate their funds, neither is their permission taken when we do so. There is no monetary transaction involved, neither is there any influence of the AMC. The rating is given to all funds, barring a few instances (see Exceptions).
Furthermore, the methodology is purely quantitative with absolutely no element of subjectivity involved. Our methodology makes the rankings devoid of any individual opinion or view. Finally, there is no concealed data that is employed. The ratings are a numerical exercise based purely on publicly available data that is declared every single month by the AMC.
Now, let's look at your next question on how to use them to make a fund selection.
The ratings are an excellent starting point to picking a fund. But you have to decide on the fund type you want to invest in. A 5-star liquid fund will be a poor choice for those who want to invest for the long term. Similarly, a 5-star equity diversified fund will be a very risky bet for those whose time frame is just three months.
Once the category is decided upon, the rating helps eliminate, choose and monitor the fund. The poorly rated funds are a great elimination criteria and the focus can now be on the 4- and 5-star rated funds.
The ratings must be used only in comparison with a fund's peers. You cannot compare a 5-star rating of an infrastructure fund with the 4-star rating of an equity diversified large-cap fund. The comparisons have to stay within the peer group. If you get onto our website, www.valueresearchonline.com, you will see that there are numerous categories of funds. These funds were earlier categorized based on their declared objectives, but from last year, the peer group (all funds that fall in a single category) is based on the funds' actual portfolio characteristics. So in a debt fund, the average portfolio maturity will determine the category and in the case of an equity fund, it will be the average market capitalization. In the case of hybrids, the debt-equity asset allocation will be the determining factor.
Does the rating change? Certainly. The rating essentially assesses the risk-adjusted returns of funds, which means that it takes into account the returns and the risk taken to achieve that return. The change in rating would reflect a change in the risk-return numbers. In this way, the rating helps the investor in monitoring his fund's performance. Though the rating gives a quick summary of how a fund has performed historically relative to its peers, it does not reflect Value Research's opinion of the future potential of any fund. So while the ratings are an excellent starting point to picking up funds that have a performance track record, it is no guarantee of a fund's performance in the future. I would also like to point out that there may even be a great fund which has not got rated simply because it has not completed a minimum tenure, since we are adamant about rating funds that have a substantial performance history. The Value Research Fund rating facilitates an efficient fund selection. By looking only at the top-rated funds, the universe is instantly reduced to a few superior funds in comparison with its peers. The final selection will depend on you, but it does help in narrowing the field.