What is the chance that I'll lose money? Every investor asks himself this question at the time of making an investment. Understandably so considering nobody likes to lose his or her hard-earned money. The key to understanding risk – and to make it work for you – is to understand the trade-off between risk and reward. This is what Fund Rating is all about -- a quick and easy way to identify funds that have produced strong risk-adjusted performance vis-a-vis their peers.
Here is an overview of key rating changes across the universe of rated open-end funds in June. For your information, there are some funds that have not made it to the rating category as they too young -- less than three-year-old equity and hybrid funds and less than 18-month-old bond and cash funds.
After nearly eight months, leading equity funds were able improve their risk-adjusted performance, besides beating their benchmarks. And this showed – 12 Equity Funds registered a rating upgrade, while 8 slipped on Ratings. Pioneer ITI Bluechip, Pioneer ITI Prima and Zurich India Equity got back their 5-star status which they had lost last month. Ditto for Tata Tax Saving Fund which is again a 5-star after two months. This month, Reliance Growth also joined the esteemed 5-star league after almost a year and a half.
Prudential-ICICI FMCG saw its fortunes or stars soar after entering the rating category in May this year. It gained a star this month and is a 2-star fund today. Likewise, Libra Leap, Magnum Taxgain, Prudential ICICI Power and Sun F&C Value gained on the rating scale to join the 4-star league. The new members in the rated equity fund family this month were: Tata Life Sciences & Technology (3-star), IDBI Principal Index Fund (2-star).
On the other hand, the losers in June were Alliance Equity, Birla Equity Plan and Pioneer ITI Infotech, which slipped from being a 5-star fund to a 4-star fund. Prudential ICICI Growth Plan and Tata Pure Equity turned into a 3-star from a 4-star while ING Growth Sector Portfolio managed just 2 stars in June. Canbonus and Dhanvikas fell further into the lowest 1-star category. In the hybrid-rating category, there were only two funds, which moved down the rating ladder: Alliance '95 from 5-star to 4-star and UTI Retirement Benefit Unit Plan from 3-star to 2-star.
As for the medium and long-term debt funds, of the 47 rated funds in this category, the maximum number still falls in the 4-star category, with a few 5-starrers. Four funds improved their lot by gaining a star each while three funds lost a star. However, Prudential ICICI Income Plan acquired its lost position this month, it was back to being a 4-star.
The short-term debt fund category had a new entry in June: Grindlays Super Saver Income Short-term (4-star). As for other funds in the category, only Reliance Liquid Treasury Plan graduated to the family of 4-star funds.
Fund Families: How they Stack Up
A closer look at the AMCs now…
Of the total of 168 rated funds, 12 are 5-star funds, 51 are 4-star funds, 53 are 3-star funds, 36 are 2-star funds and 16 are 1-star funds. The 3-star category accounted for a major chunk of funds. Pioneer ITI Family continues to shine even in this dreary market. Out of 11 rated funds, 4 are 5-star funds. This family has the maximum number of 5-star funds, closely followed by Zurich India with two 5-star funds. Alliance Capital, Canbank, Escorts, JM, Reliance Capital and Tata TD Waterhouse have a single 5-star fund to their credit.
On the other hand, Zurich India has the highest number of 4-star funds indicating strong risk-adjusted performance record. Closely following it are Alliance Capital, Birla Sunlife and Pioneer ITI, with 4 funds as 4-star.
Of the total 16 single-star funds, LIC Mutual accounts for the lion's share, with 4 members from its family having 1-star. As for the Unit Trust of India, 9 funds from its family are in the 2-star category (total players: 30).
Now for some general information, we would like to reiterate the fact that this fund rating does not indicate whether a particular fund is a good or a bad investment, it only lets you know how volatile or how risky a fund is vis-à-vis its risk-free return. For instance, Pioneer Infotech is a 5-star fund but in no way does it imply that it is a good investment. What it suggests is that though it is a risky investment it compensates you handsomely for the risk you take. So, a fund rating must be viewed in conjunction with its Return and Risk Grade, and not in isolation.
Does rating change mean it's time to buy or sell any of these funds? No. Because the star ratings are better suited to judge past performance than predicting the future. We advise you not to base your investment decision on ratings alone. Be sure to ask key questions about the fund manager tenure, costs, holdings, long-term performance, and strategy, and do consider whether the fund fits in your overall investment plan before you buy or sell it. But we can assure you that Value Research Fund Rating is definitely a good starting point.