Value Research fund rating is a convenient composite measure of both returns and risk. This single measure combines the Value Research Fund Risk Grade and the Value Research Fund Return Grade to indicate a fund’s risk-adjusted return. This rating is purely quantitative, with no subjective component to it. It is a unified performance measure and summarises how a fund has performed historically, relative to the other funds in its category, for the risks it has taken.
For equity and hybrid funds, the fund ratings for the two time periods (three and five years) are combined to give a single assessment of each fund’s rating vis-à-vis other funds in each fund category. A 60 per cent weight is assigned to the five-year score and a 40 per cent weight to the three-year score to arrive at the aggregate score. The funds which do not have a five-year history are given a 100 per cent weight for their three-year score. For debt funds, the fund ratings are based on 18-month weekly risk-adjusted performance, relative to the other funds in the category.
A risk score and returns score is calculated separately for each fund and then the risk score is subtracted from the return score to arrive at a composite score. This is a single risk-adjusted performance measure which forms the basis for rating. The resulting number is then rated according to the following distribution:
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Top 10% |
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Next 22.5% |
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Middle 35% |
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Next 22.5% |
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Bottom 10% |
Value Research Fund Risk Grade
Value Research Fund Risk Grade captures the fund’s risk of loss. It is different from the conventional risk and volatility measures like standard deviation and beta as it indicates only downside volatility. The latter refers to absolute losses and even periods when the fund underperforms a risk-free guaranteed investment. The rationale: you can always get a guaranteed return by investing in a risk-free guaranteed investment like a bank term deposit. The risk of investing in a mutual fund not only includes the possibility of losing money, but also the chance of earning less than you would have on a guaranteed investment.
To calculate fund risk, monthly/weekly fund returns are compared against the monthly risk-free return for equity and hybrid funds and the weekly risk-free return for debt funds. Risk-free return is defined as State Bank’s 45-180 days Term Deposit Rate. For all months/weeks the fund has underperformed the risk-free return, the magnitude of underperformance is added. This helps us to arrive at the average underperformance and how the fund has performed vis-à-vis its category average. The relative performance of the fund is expressed as a risk score.
The risk score of a fund is then rated according to the following distribution:
| High | Top 10% |
| Above Average | Next 22.5% |
| Average | Middle 35% |
| Below Average | Next 22.5% |
| Low | Bottom 10% |
Value Research Fund Return Grade
Value Research Fund Return Grade captures a fund’s risk-adjusted return in comparison to other funds in the category. The returns, though adjusted for dividend, bonus or rights, are not adjusted for loads. The fund’s monthly/weekly return is compared with the monthly/weekly risk-free return to arrive at the fund’s total return over the risk-free return. The monthly average risk-adjusted return is compared with the average category return to arrive at the final score. In case of a negative category average return, the risk-free return is used as a benchmark. A score in excess of one indicates that the fund has performed better than its category average and vice-versa.
The return score of a fund is then assigned according to the following distribution:
| High | Top 10% |
| Above Average | Next 22.5% |
| Average | Middle 35% |
| Below Average | Next 22.5% |
| Low | Bottom 10% |
Cases when a fund is not rated
- Value Research does not rate an equity or hybrid fund with less than a three-year performance and a debt fund with less than an 18-month performance track record.
- Each category must have a minimum of 10 funds for it to be rated.
- A fund with less than Rs 5 crore of average assets under management in the past six months is not eligible for rating.
- In case of categories where funds aren’t comparable or don’t form a homogeneous set, ratings aren’t calculated.
- We don’t rate ETFs as, generally, the performance reflected by the NAV is actually not what an investor might get.
- Funds which have undergone a material change in their investment objective recently, which renders their past performance irrelevant in the context of peers.
You can read the rating FAQ document for more information.
