The BL Portfolio Star Track Mutual Fund Ratings is a proprietary offering from BusinessLine’s in-house Research Bureau and is widely followed by our print and online subscribers. We are happy to announce the refreshed mutual fund ratings for both print and digital audiences from this week onwards, with value additions.

Rating methodology

We have high conviction on our existing ratings methodology and hence, in this relaunch, nothing changes on this front. Our rating is based on the historical performance of funds (regular plans) measured both in terms of return (rolling returns) and risk (sortino ratio). 

Rolling returns help identify schemes that have delivered relatively consistent returns during various market cycles and over the long run. We consider 1, 3 and 5-year rolling returns over a 7-year NAV history for equity and hybrid funds. For debt-oriented funds, it will be 1,2 and 3-year rolling returns over a 5-year NAV history. Sortino ratio measures the performance of the schemes during downtrends, thus capturing the downside risk.

One-year trailing return is also considered to assess the fund’s recent performance. To arrive at the final score, we assign a 60 per cent weightage for past performance based on rolling returns. Sortino ratio and one-year performance is given a 30 per cent and 10 per cent weightage respectively. The final score is used to rate funds within each category, from 5-star to 1-star, with 5-star being the best rating.

Note that the ratings will not change every week or even every month (we didn’t change it frequently in the past too!). While the NAV may fluctuate every day and hence short-term returns, a frequent re-look at ratings especially when we are considering 7-year and 5-year NAV history won’t serve any purpose.

We thus plan to revise the ratings every six months. We will announce it in the week of revision.

What’s changed

The change you will see from this week onwards is at three levels.

One, with interest in international investing as well as low-cost passive funds picking up since the pandemic, we have brought these two categories under our coverage. Avenues used for temporary parking of funds ie liquid, overnight and arbitrage funds have also been introduced. Thus, we now have funds under six categories – Equity, Passive, Cash, Debt, Overseas and Solution-oriented. Category demarcations have been clearly mentioned (unlike before) for easy navigability.

Two, you will be able to see additional disclosure/performance metrics for each fund. Direct plans are catching on considering the penetration of app-based investing and increased awareness of the compounding effect of lower expense ratios of direct plans, on returns. In our Star Track Ratings now, you will be able to compare expense ratios for direct and regular plans side by side.

For equity funds and solution funds, we have brought in 10-year returns instead to give long-term investors, a perspective. Ditto with new categories — passive and overseas funds. However, considering that cash funds are predominantly short-term parking grounds, we show 1,3,6 month and 1-year returns for this category.

Most important, you will now have one-stop access to three new metrics for all funds — sortino ratio (equity, solution, overseas categories), tracking error (passive) and exposure to ‘AA & below’ rated instruments (debt, cash categories).

Among similar rated funds, sortino ratio (higher, the better) and exposure to instruments with lower credit rating (lower, the better), can provide additional insight to making a choice based on your risk profile. With all passive funds closely replicating the underlying index, lower tracking error will give an edge on returns. Tracking error in our ratings is calculated using daily data over a three-year period.

Three, we have updated the ratings based on data as of June 1, 2022.  Watch out for the movement in ratings across funds and new funds (unrated earlier because of non-fulfilment of our criteria) entering the fray.

Rating exclusions

Since the beginning, we have not rated certain funds/categories due to a few reasons. Funds with a corpus of less than ₹100 crore, those that have less than a 7-year or 5-year NAV history, categories that have less than five funds, and schemes that have undergone a drastic change in their mandate and portfolio (including multi-cap category) are examples.

Retirement funds and children’s funds are also not rated as the investment styles are not homogeneous and hence, an apple for apple comparison among funds is not possible. For the same reason, we have not rated the newly added category of overseas funds.

We have just showcased select global funds under three sub-groups — US-focused, emerging markets and global. Passive funds too cannot be rated based on return metrics and hence, they are excluded from ratings.

However, we have showcased Index funds/ETFs based on key indices — Nifty, Sensex, Nifty Next 50, Banking, Midcap and Smallcap indices. Smart Beta funds and Gold and Silver ETFs have also been included.

Here too, we have cherry-picked funds based on metrics such as relatively low tracking error, higher trading volumes in ETFs (to ensure enough liquidity) and higher AUMs. Since liquid, overnight and arbitrage funds are predominantly short-term parking grounds for cash, we haven’t rated these as well.  

We hope that our Star Track MF Ratings V 2.0 will serve as an able guide to make your choices. Happy investing!