Mutual Funds

Your Fund Portfolio

Radhika Merwin | Updated on May 24, 2020

I am 51. I have been following this column and BusinessLine Portfolio for more than a decade. I had invested in FT Ultra ST Bond (USTB) and FT Credit Risk funds. USTB was rated 5-star by all the rating agencies including BL. Is this rating mechanism wrong?

Dominic Prakash

It is indeed unfortunate that investors like you are facing hardships owing to the winding up of some of Franklin Templeton’s debt funds. These are extraordinary times where underlying risk in the portfolio gets heightened owing to illiquidity in bonds with low credit ratings.

The reason most mutual fund ratings, including ours, may have had a higher ratings for the funds is that they are based on return performance and not necessarily on the credit ratings of the bonds in a fund’s portfolio. While it is true that the quality of the fund portfolio is important, different investors have different risk appetites.

Hence, some investors may want to take higher risk (invest in funds with low-rated bonds) to earn higher returns. It is for this reason that in a rating exercise, where we have to cater to all investors, we take return performance as the key factor for assessing a fund. Since many Franklin funds score high on returns (due to investment in high-yielding low-rated bonds), they are among the top in most ratings.

BusinessLine Portfolio Star Track MF Ratings is among the more superior ratings studies as we look at one-, two- and three-year rolling returns (not point-to-point) for debt funds across a five-year NAV history.

We also consider Sortino ratio to measure schemes’ performance during downtrends, to assess the downside risk.

We place greater emphasis on the quality of a fund’s portfolio in our weekly fund recommendations.

We choose the funds based on not just returns but also other factors such as portfolio composition, fund manager track record, corpus and expense ratio. Do go through our recommendations every week.

Our fund query column every week also gives a more comprehensive view on various funds. We appreciate that you reached out to us with your feedback. Do write to us if you have any further clarification.

Published on May 24, 2020

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