Big Questions
Why does Value Research have two different ratings for the same mutual fund?
Direct and regular plans of a mutual fund have different ratings and here's why
30-Sep-2022
Value Research has a relative rating system where it rates mutual funds within various categories. When you see a 5-star rated fund, that means it is a 5-star fund in its own category and relative to all other funds in that category. So, between a 5-star and a 4-star fund, the latter has generated lower risk-adjusted returns compared to the former in a given category.
Reasons for different ratings
However, when it comes to the direct and regular plans of a mutual fund, the difference in risk-adjusted performance within their respective sets leads to different ratings. Hence, the direct and regular plans of a particular fund are rated differently.
For instance, the direct plan of Axis Bluechip Fund (a large-cap fund) will be compared with the direct plans of all other large-cap funds. The reason for rating them separately is because that is how investors go about choosing their funds. Either you are evaluating the fund yourself for a direct plan or an intermediary is selling you a regular plan.
The risk-adjusted performance on a relative basis of regular plans and direct plans can be different. There is a possibility of a regular plan of a mutual fund to be 5-star, simply because it is better than all other funds in the category. The direct plan of the same fund can have lower risk-adjusted performance as compared to direct plans of other funds in the same category and hence, may have a lower rating. The expense ratio is another factor that makes a difference.
So, it is a comparison of a direct plan with the other direct plans in the category and a regular plan with the other regular plans within the category. The difference in fees and the variation in the relative performance of the fund compared to other funds from the same category leads to this difference in rating.
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