Crisil Rating System for Mutual Funds

The CRISIL mutual fund ranking helps investors compare mutual fund schemes within the same category using a research-based ranking framework. It evaluates funds on multiple parameters instead of relying only on returns. It is important to note that CRISIL rating for mutual funds is different from the credit ratings assigned to companies or bonds by CRISIL Ratings Ltd. In this article we will understand how CRISIL ranks mutual funds, what the rankings mean, and how investors can use them.

What Types of Mutual Funds Are Ranked?

CRISIL ranks mutual fund schemes across various categories so that investors can compare funds with similar investment objectives.

Some of the commonly ranked categories include:

• Large Cap Equity Funds
• Mid Cap and Small Cap Funds
• Multi Cap and Flexi Cap Funds
• ELSS (Tax-Saving) Funds
• Hybrid Mutual Funds
• Short Duration Debt Funds
• Corporate Bond Funds
• Liquid Funds
• Gilt Funds
• Index Funds and Exchange Traded Funds (where applicable)

Each scheme is evaluated only against other funds within the same category, making comparisons more relevant.

CRISIL Rating for Mutual Funds

CRISIL assigns ranks based on the relative performance of mutual fund schemes within a particular category.

These rankings are comparative in nature. A Rank 1 fund is not guaranteed to deliver better future returns, and rankings may change as market conditions and fund performance change.

CRISIL Mutual Fund Ranking

CRISIL evaluates mutual fund schemes using multiple quantitative and qualitative factors instead of relying only on past returns.
Some of the key factors considered include:

• Risk-Adjusted Performance: Returns are evaluated after considering the level of risk taken by the fund.
• Consistency of Performance: Schemes that deliver relatively consistent performance over different market phases receive favourable consideration.
• Portfolio Characteristics: The quality, diversification, and composition of the portfolio are reviewed as part of the assessment.
• Volatility Analysis: CRISIL measures how much a fund's returns fluctuate over time compared with similar schemes.
• Peer Group Comparison: Every scheme is compared only with funds in the same investment category rather than across different categories.
• Periodic Review: Rankings are reviewed regularly to reflect changes in market conditions and fund performance.

How CRISIL Works in Financial Markets

CRISIL performs different functions across India's financial markets. While its research division ranks mutual funds, CRISIL Ratings Ltd focuses on assessing the credit risk of debt instruments and issuers.

Its key activities include:

1. Credit Ratings:

Evaluates the creditworthiness of companies, banks, financial institutions, and debt securities.

2. Research and Analytics:

Provides market research, industry analysis, benchmarking, and insights across various sectors.

3. Risk Assessment:

Helps financial institutions and businesses evaluate financial and operational risks.

4. Mutual Fund Rankings:

Compares mutual fund schemes within the same category using a structured ranking methodology. These rankings are separate from CRISIL's credit ratings.

How Is CRISIL Rating Used in Investment Decisions?

The CRISIL rating for mutual funds can support investors when comparing schemes, but it should not be the only factor considered before investing.

Investors generally use CRISIL rankings to:

1. Compare Similar Funds:

Rankings help compare schemes that have the same investment objective and category.

2. Review Historical Performance:

Investors can understand how a fund has performed relative to its peers over a specific period.

3. Support Fund Selection:

Rankings can act as one of several parameters while shortlisting mutual funds.

4. Monitor Existing Investments:

Periodic ranking changes may encourage investors to review their portfolio and understand how a fund compares with similar schemes.

5. Complement Other Research:

Investors often consider CRISIL rankings alongside factors such as investment objective, portfolio quality, expense ratio, and fund manager's track record.

How Does CRISIL Rank Mutual Fund Schemes?

CRISIL follows a structured evaluation process to compare mutual fund schemes within the same category.

The ranking process generally includes:

1. Grouping Similar Funds:

Mutual funds are first classified into comparable categories based on their investment mandate.

2. Evaluating Multiple Parameters:

Performance, volatility, portfolio characteristics, and consistency are assessed together rather than in isolation.

3. Comparing Relative Performance:

Every scheme is measured against its peer group instead of the broader mutual fund universe.

4. Reviewing Performance Periodically:

Rankings are updated at regular intervals to reflect changes in market conditions and fund performance.

5. Providing Relative Rankings:

A CRISIL Rank indicates how a scheme compares with similar funds. It does not predict future performance or guarantee returns.

CRISIL vs Value Research vs Morningstar Ratings

Different research agencies may assign different ratings to the same mutual fund because each follows its own evaluation methodology.

Different rating systems do not always signify that one organisation is right and the other is wrong since every organisation uses its own approach and rating system that may produce different results when applied to the same mutual fund. 

Conclusion

A CRISIL mutual fund rating is a systematic approach in the evaluation of mutual funds within a particular category. The mutual fund's rating is done based on various aspects of a mutual fund scheme rather than just evaluating it on the basis of returns earned. It is important to note that a CRISIL rating for mutual funds is not the same as the credit rating accorded to firms and debt issues.