Only rating not enough to invest in MFs

• Follow

Investors try to avoid the hassles of research about mutual fund schemes before investing so they look at the ratings. Besides this, funds also promote schemes with good ratings. However, its important to know about the ratings of mutual funds. Rating agencies like Crisil, also give a rating to mutual fund schemes. Ratings try to give information on risk and return pertaining to the scheme. It also helps in comparing different schemes on some parameters.

Rating of a fund is done on the basis of 3-year, 5 year and 10-year performance. Each agency has its own methodology of rating but some basic principles remain same. return by equity fund, how old is fund, expense ratio brand value of AMC, etc. Many such factors are studied for rating.

For debt funds, they look at yield to maturity, credit rating among other factors.

So, how does a fund with a 5-star rating fund fare so badly? There could be many reasons for that. There can be a sudden change in a fund. A fund manager can commit a mistake which in turn can impact the fund’s performance. Sometimes, the fund manager that drove superior returns leaves the fund. This can impact the fund’s performance.

On the other hand, sometimes the fortunes of a poor-rating fund can turn for the better. Such a fund can change its investment strategy or hire a new fund manager, which can improve its returns.

What should you do when your five-star rated fund performs poorly?  Experts suggest not panicking on one poor return for one year. If a fund has performed well for the past 10-15 years, then you should keep your trust in it for one or two years more. However, if the ratings of a fund are continuously declining, then it’s a big reason to worry.

Experts suggest not investing in a mutual fund just on the basis of rating. Besides rating, you should look at various other factors like the reputation of a fund, the credibility of a fund manager, and his investment strategy.

Investing just on the basis of ratings is bad practice. Just ratings don’t define the complete picture. You should know about your goals. Are you looking to invest for the short term or long term? What’s your preference about liquidity like how easily you can sell a unit of a fund? You have to consider all these factors.

Overall we can say that rating is just an initial screener for choosing a mutual fund scheme. You should keep in mind that the past performance of a scheme doesn’t guarantee a similar return in the future. Look at the track record of a fund before investing. Also, look at the credibility and reputation of a fund manager. If you are unable to assess all this properly then you can take help from a financial manager.