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Decline in star-rating of a fund

The rating downgrade shows that the fund's performance with respect to its peers has not been good

You had given a 5-star rating to DSPBR Micro Cap fund which has now gone down to 3 stars. What is the reason for this downgrade? The fund was also recommended in Mutual Fund Insight. What should investors in the fund do?
-Haresh

The rating downgrade shows that the fund's performance with respect to its peers in the mid & small-cap category has not been good.

While recommending this fund we have always maintained that it is among the riskiest funds in the category. Hence it has performed as expected. Being a small-cap fund, it is expected to be more volatile than the mid-cap funds in category.

Mid-cap funds invest in stocks with higher market capitalisation. Current market capitalisation of the fund at Rs 1,250 crore is third lowest in the category while the median market capitalisation of the funds in this category is Rs 5,300 crore.

This is also the reason for the fund's poor performance in the market downturn of 2008 and 2011. This year it lost 17 per cent against category's 12 per cent (as on Sep 19, 2013).

It has also rewarded investors during rising markets. DSPBR Micro Cap fund was the third best in its category in 2009 and best in 2010 with 116 per cent and 44 per cent returns respectively.

This is how the fund is expected to perform, and it is not for risk-averse investors. One has to stay put for long-term to reap the benefits.



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