Crisil Mutual Fund Ranking: Meaning, Parameters, & Criteria

CRISIL is a prominent Indian credit rating agency that provides mutual fund rankings. Their methodology is based on global best practices and covers various categories across equity, debt, and hybrid asset classes. CRISIL’s mutual fund ranking methodology evaluates funds based on various parameters, including risk-adjusted returns, asset quality, liquidity, and asset concentration. It’s important to note that while ratings don’t guarantee future returns, they instil confidence in investors by providing an assessment of the fund’s authenticity and capabilities.

What is Crisil?

Established in 1987, Credit Rating Information Services of India Limited (CRISIL) stands as India’s first credit rating agency, with ICICI Ltd, UTI, and other financial institutions as its promoters. CRISIL has diversified its services to include ratings, research, risk, and policy advisory, among others. CRISIL has a significant global presence and serves a large clientele. S&P Global Inc. holds the majority stake in the company. The company collaborates with policymakers in India’s infrastructure sector and other emerging markets.

What is the Crisil Mutual Fund Ranking?

CRISIL ratings for mutual funds enable investors to assess and compare the market’s top-performing funds. CRISIL evaluates funds based on qualitative and quantitative parameters, encompassing both hard and soft factors. These ratings benefit not only investors but also asset management firms and intermediaries. CRISIL’s mutual fund ratings fall under SEBI regulation. While SEBI regulates mutual funds and credit rating agencies, it does not directly regulate mutual fund rankings provided by agencies like CRISIL. However, these agencies must ensure their methodologies are transparent and not misleading.

How Does the Crisil Mutual Fund Ranking Work?

Crisil Mutual Fund Ranking or CMFR goes beyond conventional ranking models, assessing mutual funds by analysing not only net asset value (NAV) but also portfolio-based attributes. This comprehensive approach provides a singular evaluation incorporating asset quality, risk-adjusted returns, liquidity, and asset concentration. The rating system assigns ranks or star ratings on a 1 to 5 scale. For example, CRISIL Fund Rank 1 signifies ‘excellent performance,’ placing a fund in the top 10 percentile of its peer group, while CRISIL Fund Rank 2 covers the subsequent 20 percentile.

What are the Parameters for Crisil Mutual Fund Ranking?

CRISIL’s methodology includes quantitative and qualitative assessments, covering risk-adjusted returns and portfolio attributes. Here are a few parameters for CRISIL MF ranking:

Superior Return Score (SRS)

• Measures a fund’s returns and risks relative to similar portfolios.
• Enables comparisons between funds of the same category.

Industry Risk Score (IRS)

• Evaluates industry risks for debt funds.
• Assesses a fund’s ability to meet debt obligations within a specific timeframe.

Mean Return & Volatility

• Mean return gauges a fund’s average daily returns over a specified period.
• Volatility measures the variation in returns, providing insights into risk.

Portfolio Concentration Analysis

• Over-diversification can lead to concentration risks, reducing the effectiveness of diversification.
• Funds with excessive portfolio diversification receive lower mutual fund ranking Crisil in this analysis.

Liquidity Analysis

• Assesses how easily a fund can liquidate holdings.
• Lower liquidity score indicates higher liquidity, facilitating easy redemption or trading.

Quality of Asset

• Evaluates the creditworthiness of issuers and overall risk in debt security investments.
• Reflects the likelihood of issuer defaulting on timely debt repayment.

Tracking Error

• Measures how accurately an index fund tracks its benchmark.
• A low tracking error signifies precise tracking of the benchmark.

Counting of Negative Returns

• Primarily used for arbitrage funds to evaluate downside risks.

In summary, CRISIL’s evaluation encompasses crucial factors such as returns, risks, industry considerations, volatility, diversification, liquidity, asset quality, tracking precision, and downside risks, providing investors with a comprehensive understanding of top rated mutual funds’ performance.

Criteria of Crisil Mutual Fund Ranking

Here are the specific criteria guiding the inclusion of funds:

• Ratings are exclusively assigned to open-ended mutual funds; interval funds, ETFs, and closed-ended funds are not considered.
• Net Asset Value (NAV) is calculated over three years for equity, hybrid, and debt funds. For corporate bonds, credit risk, PSUs, and other short-duration funds, the NAV is calculated over one year.
• Equities with an Asset Under Management (AUM) cutoff of Rs. 10 cr., debt, and hybrid with an AUM cutoff of Rs. 50 cr., and debt funds (including money market, ultra-short-term, & liquid funds) with less than one-year maturity should have an AUM cutoff of Rs. 250 cr..
• Portfolio disclosure for three years is required as of the last quarter.

Crisil Ranking for Mutual Funds from 1 to 5 Stars Rating

CRISIL assigns ranks on a scale from 1 to 5, with Rank 1 denoting excellent performance. The top 10% of funds in a peer group receive CRISIL Fund Rank 1, while the next 20% are designated as CRISIL Fund Rank 2. This ranking system aids investors in identifying funds with the potential for significant returns. These ratings, encompassing return and risk, aid investors in gauging a fund’s capacity to generate returns amidst varying risks.

What Does the Crisil Rating Mean to Investors?

CRISIL ratings offer a reliable and comprehensive assessment by scrutinising various factors, making it a preferred choice for many fund houses. However, it’s essential to note that these ratings don’t necessarily indicate higher return potential due to market unpredictability. To gauge performance, consider additional assessment metrics alongside CRISIL ratings. In summary, CRISIL’s global reputation as an unbiased rating agency makes it a go-to for both experienced and novice investors when evaluating mutual funds.

How is CRISIL Rating Used in Investment Decisions?

The CRISIL rating assesses an organisation’s financial health, gauging its consistent ability to meet liability obligations on time. Regular updates by CRISIL make it a valuable resource for investors facing time or resource constraints, aiding informed investment decisions.

What Does the Crisil Rating Mean to Depositors?

CRISIL evaluates various financial instruments, including fixed deposits. When considering a fixed deposit, investors typically prioritise a high interest rate. CRISIL assigns ratings to different financial institutions and fixed deposits, aiding depositors in selecting options with both safety and appealing interest rates. CRISIL’s fixed deposit rating scale includes ratings such as ‘FAAA’ (highest degree of safety), ‘FAA’, ‘FA’, ‘FB’, ‘FC’, and ‘FD’ (default).

Scales of the Crisil Mutual Fund Ranking

Long-Term Ratings

CRISIL’s long-term rating scale ranges from ‘CRISIL AAA’ (highest degree of safety) to ‘CRISIL D’ (default), with intermediate ratings such as ‘CRISIL AA’, ‘CRISIL A’, ‘CRISIL BBB’, and so forth.

Short-Term Ratings

CRISIL’s short-term rating scale includes ratings like ‘CRISIL A1’ (very strong degree of safety), ‘CRISIL A2’, ‘CRISIL A3’, ‘CRISIL A4’, and ‘CRISIL D’ (default).

Dual Ratings

Certain debt instruments with a maturity beyond one year and an exercisable put option within a year receive dual ratings. The first component reflects timely payments, while the second component indicates payment likelihood when the put option is exercised, denoted by ratings like ‘CRISIL AA+’ and ‘CRISIL A1+’.

Structured Obligation Ratings (SO)

Reserved for short-term and long-term structured finance instruments, SO applies to asset-backed or securitised transactions. Ratings range from ‘CRISIL AAA (SO)’ to ‘CRISIL D (SO)’ for long-term, and ‘CRISIL A1 (SO)’ to ‘CRISIL D (SO)’ for short-term.

Credit Enhancement Ratings (CE)

Assigned to instruments with explicit external credit enhancement, but not considered bankruptcy remote from the issuer/originator. Ratings range from ‘CRISIL AAA (CE)’ to ‘CRISIL D (CE)’ for long-term, and ‘CRISIL A1 (CE)’ to ‘CRISIL D (CE)’ for short-term.

Fixed Deposit (FD) Ratings

CRISIL rates fixed deposits of banks, financial institutions, and corporates on a 14-point scale, prefixed by ‘F’ and ranging from ‘FAAA’ to ‘FD.’

Financial Strength Ratings

Specifically for insurance companies, these ratings range from ‘AAA’ to ‘D.’

What Does the Crisil Mutual Fund Ranking Mean for MFs?

Launched in 2000, the Crisil Mutual Fund Ranking (CMFR) has become widely accepted in the financial industry. Covering various asset classes such as debt, equity, and hybrid, CMFR employs global best practices to assess mutual funds. It evaluates crucial factors like asset concentration, quality, risk-adjusted returns, and liquidity, offering a comprehensive single-point analysis.

Crisil ratings consider different time frames, such as three, five, or ten years, providing a measure of a fund’s risk-adjusted performance. The combination of these timelines determines the fund’s star rating based on percentiles.

These ratings, encompassing both risk and return, serve as a composite measure, assisting investors in evaluating a fund’s capacity to generate returns. For those considering mutual fund investments, Crisil ratings offer valuable insights into making informed investment decisions.

What is the Difference Between a Credit Rating and Credit Score?

Credit rating focuses on a company’s ability to repay debts, using alphabetical symbols, while credit score evaluates an individual’s creditworthiness numerically. Higher ratings or scores indicate lower risk, influencing loan or credit card approvals.

Aspect	Credit Rating	Credit Score
Definition	Assesses a company or business’s creditworthiness	Calculates an individual’s creditworthiness
Applicability	Applies to companies or businesses	Pertains to individuals
Information Source	Based on corporate financial instruments	Derived from an individual’s credit information
Representation	Represented by alphabetical symbols (AAA, AA, A)	Represented by a numerical range (300 to 900)
Probability of Default	Higher ratings imply a low probability of default	Higher scores indicate lower credit risk
Rating Scale Interpretation	AAA is a good rating; below BB is bad credit rating	Higher scores are favorable for loan or credit card approval

To Wrap It Up…

Crisil evaluates mutual funds across debt, equity, and hybrid categories using portfolio-based attributes and the fund’s NAV. The ranking scale ranges from 1 to 5, with the top 10 percentile earning a rank of 1 and the top 20 percentile securing a rank of 2. It’s crucial to recognise that the Crisil rating shouldn’t be the sole determinant for investment decisions in mutual funds. Instead, consider it as a broad filter to gauge the quality and overall health of a mutual fund scheme. The final analysis should account for discretion and portfolio specifics.

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