Mutual funds are one of the most popular investments in India. Being a relatively safe financial instrument offering decent returns, mutual funds form a significant portion of investments for most people.
If you, too, invest in mutual funds, you must wonder if there is a way to make your investments worthwhile. How can you ensure that you invest your money in a trustworthy mutual fund scheme? CRISIL mutual fund rankings are the answer to all your concerns.
So, let’s see what CRISIL mutual fund rankings are, their benefits, and how they can help maximise your investments.
CRISIL stands for “Credit Rating Information Services of India.” It is primarily a credit rating agency but also has a trusted mutual fund ranking system.
The CRISIL mutual fund rankings started in June 2000 and quickly became one of the coveted means of assessing companies’ performance. Their methodology considers global best practices and has seen wide acceptance by many stakeholders, including asset management companies, financial experts, and investors.
The categories that the CRISIL rating system covers are across multiple classes, such as equity, debt, and hybrid assets. While contemporary ranking models consider returns or net asset value, CRISIL mutual fund rankings go a step further.
CRISIL evaluates specific portfolio-based attributes along with net asset value. This gives an easy overview of mutual funds, showing the most important parameters like risk-adjusted returns, asset quality, and more.
The CRISIL rating then ranks each mutual fund on a scale from one to five, with one being excellent and five indicating abysmal performance.
How Does the CRISIL Mutual Fund Ranking Work?
Here are some parameters that CRISIL uses to rank different mutual funds:
1. Mean return and volatility
Mean return denotes the average daily return, and volatility measures the standard deviation of the returns. The analysis period is three years for equity, hybrid, gilt, dynamic, medium duration, medium to long duration, banking & PSU, corporate bond, credit risk, and short duration categories. It is one year for liquid, low duration, ultra-short, and money market categories.
2. Active return
Similar to mean return, active return denotes returns for large-cap, large and mid-cap, multi-cap, and mid-cap, focused exclusively on equity funds.
3. Portfolio concentration analysis
Measures the risk due to improper diversification. Equity funds measure company and industry diversification, while debt funds have an individual issue-specific limit. The limit is linked to the issuer's credit rating. Higher-rated issuers have higher limits, which decrease as the rating declines.
4. Exposure to sensitive sectors
Exclusive to debt funds, it shows the risk associated with sensitive sectors. It usually covers a period of three to four years on the debt repayment capacity using different industry variables.
5. Liquidity analysis
Measures how easy it is for the portfolio to be converted to cash. A lower score denotes better liquidity. For equities, it considers the number of days required to liquidate the portfolio. The liquidity score is calculated by averaging the portfolio's liquidity over the past three months.
6. Asset quality
Measures the probability of default for debt funds. Shows how likely an issuer might default on their debt.
7. Duration
Measures the interest rate of a portfolio. Lower values have better interest rates.
8. Tracking error
Unique to index funds, it shows the variability of the index’s performance. Like other values, the lower the score, there is less error.
9. Count of negative returns
Unique to arbitrage funds, it captures the downside risk of the funds.
Now that you understand how CRISIL mutual fund rankings scores work, let’s see how the CRISIL credit ratings work.
Here are some parameters that CRISIL uses to rank different mutual funds:
1. Mean return and volatility
Mean return denotes the average daily return, and volatility measures the standard deviation of the returns. The analysis period is three years for equity, hybrid, gilt, dynamic, medium duration, medium to long duration, banking & PSU, corporate bond, credit risk, and short duration categories. It is one year for liquid, low duration, ultra-short, and money market categories.
2. Active return
Similar to mean return, active return denotes returns for large-cap, large and mid-cap, multi-cap, and mid-cap, focused exclusively on equity funds.
3. Portfolio concentration analysis
Measures the risk due to improper diversification. Equity funds measure company and industry diversification, while debt funds have an individual issue-specific limit. The limit is linked to the issuer's credit rating. Higher-rated issuers have higher limits, which decrease as the rating declines.
4. Exposure to sensitive sectors
Exclusive to debt funds, it shows the risk associated with sensitive sectors. It usually covers a period of three to four years on the debt repayment capacity using different industry variables.
5. Liquidity analysis
Measures how easy it is for the portfolio to be converted to cash. A lower score denotes better liquidity. For equities, it considers the number of days required to liquidate the portfolio. The liquidity score is calculated by averaging the portfolio's liquidity over the past three months.
6. Asset quality
Measures the probability of default for debt funds. Shows how likely an issuer might default on their debt.
7. Duration
Measures the interest rate of a portfolio. Lower values have better interest rates.
8. Tracking error
Unique to index funds, it shows the variability of the index’s performance. Like other values, the lower the score, there is less error.
9. Count of negative returns
Unique to arbitrage funds, it captures the downside risk of the funds.
Now that you understand how CRISIL mutual fund rankings scores work, let’s see how the CRISIL credit ratings work.
As mentioned earlier, CRISIL is also a credit rating agency. CRISIL credit rating shows the creditworthiness of companies and the risk associated with their various debt instruments.
CRISIL credit rating helps investors assess a company’s probability of settling repayment obligations on time. These ratings are in accordance with the Government of India’s rating system. For CRISIL mutual fund rankings, the rating scales from “CRISIL AAA” to “CRISIL D” are available.
See the detailed CRISIL rating list below:
1. CRISIL AAA
2. CRISIL AA
3. CRISIL A
4. CRISIL A1
5. CRISIL A2
6. CRISIL C
7. CRISIL D
The AAA rating signifies the highest safety levels. Only the debt instruments with the highest probability of making timely interest and principal payments get this rating. In addition, such instruments can even withstand adverse economic conditions. So, as a mutual fund investor, you can feel confident that investing in CRISIL AAAs will have a better outcome.
However, rankings below A1 are for instruments with a moderate probability of making interest and principal payments. Besides, their ability to do so may hamper them during severe economic crises. Rankings of C and D signify the worst levels of safety for a debt instrument to meet its financial obligations.
Here are some ways you can use CRISIL mutual fund rankings and credit ratings to make smarter investment decisions:
1. Invest in best-performing mutual funds
Plenty of mutual funds are in the market, but which one should you invest in? CRISIL mutual fund rankings help you make that decision by making shortlisting of top funds easier. It simplifies this process by highlighting the top-performing funds based on several factors such as past performance, asset quality, fund manager’s experience, and market conditions. This comprehensive analysis ensures investors have a reliable and holistic view of a fund’s potential. By checking the rankings (1 to 5), you can easily identify the best-performing funds, making your investment decisions more informed and confident.
2. Assess the risk associated with debt instruments
While mutual fund ratings help you assess the yield capacity of a fund, credit rating will help you evaluate the creditworthiness of a fund’s underlying debt instruments. CRISIL’s credit ratings take into account the issuer’s financial health, historical default rates, and the overall economic environment. This detailed evaluation allows you to determine the default risk of these securities before investing and, at the same time, assess the probability of earning timely returns. This meticulous approach helps you choose debt instruments that are line with your risk tolerance and investment goals.
3. Data-Backed Investment Decisions
With CRISIL scores, you can see how funds have performed over time. For example, if you like a particular fund and are unsure if it has performed well, you can compare its timeline across the years. See if the fund has consistency in its ranking, and if it is, then you can invest in it as it has more potential to see returns.
Additionally, CRISIL’s ratings are updated periodically to reflect the most current data and market conditions. This dynamic nature ensures you are always equipped with the latest information, allowing you to make timely and informed investment decisions. By analysing both historical performance and current ratings, you can identify trends and predict future performance with greater accuracy.
4. Compare funds across different categories
CRISIL mutual fund rankings allow investors to compare funds across different categories like equity, debt, hybrid, and more. This comparative analysis helps investors diversify their portfolios by selecting top-performing funds in different segments.
For example, an investor looking to balance risk and return might choose a mix of high-ranking equity and debt funds. This strategy ensures that the portfolio benefits from the growth potential of equities while maintaining stability through debt instruments.
CRISIL’s rankings facilitate better diversification and risk management by providing a clear and structured comparison.
5. Align investments with financial goals
Using CRISIL mutual fund rankings, investors can align their investments with their specific financial goals, whether it’s saving for retirement, funding a child’s education, or building a corpus for future needs. For example, an investor with a long-term horizon might opt for high-ranking equity funds, which generally offer higher returns over extended periods.
Conversely, someone with a shorter investment horizon might prefer top-ranked debt or hybrid funds for relatively lower risk and steady returns. By matching investment choices with financial objectives, CRISIL’s rankings help investors achieve their goals more effectively.
CRISIL also considers factors such as the fund’s exposure to different sectors and its adherence to investment mandates. This ensures that the funds maintain a balanced portfolio and do not deviate from their stated investment objectives, thereby protecting investor interests.
CRISIL credit ratings provide an assessment of the likelihood that a borrower will repay their debts on time. These ratings help indicate the risk of the borrower defaulting on interest or principal payments as agreed. The ratings are shown using an alphanumeric scale, with labels like ‘CRISIL AAA,’ ‘CRISIL AA,’ ‘CRISIL A,’ ‘CRISIL A1,’ and ‘CRISIL A2.’ These labels make it easy to understand the financial stability and creditworthiness of the rated entity.
The CRISIL rating is crucial for investors as it assesses the creditworthiness of financial instruments and entities. A high CRISIL rating (e.g., AAA) signals low credit risk, indicating that the issuer is financially stable and likely to meet its debt obligations. This helps investors identify safer investment opportunities, potentially reducing the risk of defaults.
Conversely, lower ratings suggest higher risk, guiding investors to demand higher returns or avoid certain investments altogether. By providing an independent and reliable assessment, CRISIL ratings enable investors to make informed decisions, balance their portfolios, and manage risk effectively, ultimately aiding in achieving their financial goals.
CRISIL ratings help investors gauge the creditworthiness of a company issuing financial instruments and assess the risk associated with those investments. Higher ratings indicate lower risk, making it easier to choose options that fit your financial goals and risk tolerance. These ratings also assist financial institutions in deciding lending terms.
CRISIL evaluates not only a company’s financial health but also rates mutual funds, bonds, and other debt securities. By analysing various factors, CRISIL enables investors to make better investment choices based on potential returns and associated risks.
CRISIL's 5-star rank is awarded to the top 10% of mutual funds in each category. These funds demonstrate exceptional performance and effective risk management. The ranking helps investors identify the best funds based on their risk-adjusted returns and consistency.
CRISIL rankings are reliable because they use thorough criteria to evaluate mutual funds. They consider various factors such as performance and risk, making them a trusted guide for investors. However, due to market volatility, these rankings do not guarantee higher returns.
CRISIL is not directly approved by the Reserve Bank of India (RBI). Instead, it is regulated by the Securities and Exchange Board of India (SEBI), which oversees credit rating agencies in the country.
The best CRISIL rating is 'CRISIL AAA'. This rating signifies the highest level of creditworthiness and indicates minimal risk of default. It helps investors identify the most stable and reliable investment options.
Yes, a credit rating is useful when investing in debt mutual funds. It helps assess the underlying securities' credit quality, indicating the default risk. This assists investors in making informed decisions based on the safety of their investment.
No, CRISIL ratings do not guarantee repayment. They provide an assessment of the issuer's creditworthiness and the risk associated with the debt instrument, helping investors gauge the likelihood of timely payments.
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01 October 2024
12 mins read
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