Your fund's rating slipped to 1 star. Time to exit?

Summary: Your fund’s star rating has dropped. Should you stay invested or sell it off? Here, we look at how Value Research’s Fund Ratings work and why you shouldn’t exit each time your mutual funds’ ratings fall.

Every month, Value Research reviews and rates mutual funds, and not every fund comes out on top. Some get upgraded while others get downgraded. But what happens when it's your fund that slips?

Your first instinct may be to panic. Your second is to sell. Both are understandable, and both could be wrong.

A falling rating doesn't make a fund bad. It means something has changed, and that change deserves a closer look, not a knee-jerk exit. To make that call wisely, you first need to understand how Value Research's Fund Ratings actually work.

Rating funds the Value Research way

Think of it like your school's grading system, where your score depends not just on how you did, but on how the rest of your class did. Value Research rates funds the same way: relative to their category peers, not in isolation.

Here's how it works:

• Each fund is assigned a return score and a risk score. 
• The risk score is subtracted from the return score to arrive at a composite, risk-adjusted measure. 
• Scores across two time periods are then combined into a single assessment.

For equity and hybrid funds, the five-year score carries 60 per cent weight and the three-year score carries 40 per cent. For debt funds, it's the three-year score (60 per cent) and the 18-month score (40 per cent). Funds without a full three- or five-year history are rated on the shorter available period alone.

Suggested read: Fund ratings guide. Analyst opinions decide.

Once ranked within their category, the top 10 per cent earn five stars. The bottom 10 per cent receive one star. Everyone else falls somewhere in between.

Low rating ≠ Bad fund

Here's the trap many investors fall into: they treat a low star rating as a verdict. It isn't.

Consider two scenarios. In the first, every fund in a category is beating its benchmark, but some still end up with one or two stars, simply because their returns lag behind their peers. In the second, the entire category is trailing its benchmark, yet a handful of funds earn four or five stars for losing less than the rest. A high rating in a weak category offers little real comfort. Beating a poor peer group is not the same as beating the market.

The lesson: always look at both how a fund performed against its category and against its benchmark. Neither number alone tells the full story.

One more thing: star ratings are backwards-looking. They capture past performance; they neither predict nor influence what comes next.

Bandhan Small Cap Fund illustrates this well. It carried a two-star rating from March 2023 through April 2024, sitting near the bottom of its category. Yet by April 2025, it had climbed to three stars, entered the top quartile of its category, and joined the top 10 per cent of performers, a position it has held since. The fund didn't change overnight. Its approach simply needed time to play out, and the rating eventually caught up.

So, should you sell your one-star fund?

If a rating drop is your only reason to exit, the answer is no. A fund can be beating its benchmark and compounding steadily, and still wear a one- or two-star badge simply because it is behind its peers.

But if your fund has been a consistent laggard for two to three years, or has seen a change in its investment approach or fund manager that has visibly hurt returns, then selling is the right call.

A rating is a signal worth reading, not a verdict worth acting on blindly.

Also rated: 3 mutual funds move from 3 to 4 stars. Should you care?

This article was originally published on March 25, 2026.