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CARE & ICRA Ratings – What They Indicate

Introduction

While CRISIL is the most popular, other agencies like CARE (Credit Analysis & Research Ltd) and ICRA (Investment Information and Credit Rating Agency) also play a vital role. These agencies primarily focus on the Credit Quality and Stability of debt mutual funds, which is critical for corporate treasuries and conservative investors.

1. ICRA Mutual Fund Ratings

ICRA focuses heavily on the "Credit Risk" aspect of mutual fund schemes. Their ratings tell an investor how safe the portfolio is from default risk.

Rating Symbols (Credit Risk)

ICRA uses a specific scale for Mutual Fund Credit Risk:

  • [ICRA]AAAmfs: Highest degree of safety regarding timely receipt of payments. Lowest credit risk.
  • [ICRA]AAmfs: High degree of safety.
  • [ICRA]Amfs: Adequate degree of safety.
  • ... down to [ICRA]Dmfs (Default).

Methodology: ICRA evaluates the credit quality of each individual bond held in the portfolio. It calculates a weighted average credit score. If a fund holds 100% Govt Bonds, it gets the highest rating. If it holds risky corporate bonds, the rating drops.

2. CARE Mutual Fund Ratings

CARE provides similar credit quality ratings but is also known for its "Capital Protection Oriented Fund" ratings.

Rating Symbols

  • CARE AAAmfs: Highest credit quality.
  • CARE AAmfs: High credit quality.

Capital Protection Ratings: For specific close-ended schemes that aim to protect capital, CARE assigns ratings like CARE AAA(SO) (Structured Obligation). This indicates the high likelihood of the scheme returning the principal amount at maturity.

3. Fund Stability Ratings (Volatility)

Apart from credit risk, agencies also rate Market Risk (Volatility).

ICRA's Volatility Rating:

  • Used to indicate how sensitive the fund's NAV is to interest rate changes.
  • Scale: V1 (Least Volatile) to V5 (Most Volatile).
  • Usage: An investor looking for an Ultra-Short term park would look for a V1 rated fund (very stable NAV).

Comparison: Credit Rating vs Ranking

It is crucial to distinguish between a "Credit Rating" (by ICRA/CARE) and a "Performance Ranking" (like CRISIL Rank 1-5).

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Exam Notes: Writing the Answer

Question: "What do the ratings [ICRA]AAAmfs and CARE AAAmfs indicate?" (10 Marks)

Model Answer:

Symbol: The suffix 'mfs' indicates "Mutual Fund Scheme".

Meaning: A rating of AAAmfs (by either ICRA or CARE) indicates that the mutual fund scheme's portfolio has the highest degree of safety regarding timely receipt of payments from the investments it holds.

Implication:

  • The fund manager has invested in high-quality AAA-rated bonds or Sovereign Securities.
  • The credit risk (risk of default) in the portfolio is negligible.
  • Note: It does NOT guarantee returns or protect against interest rate volatility. It only assures credit quality.

Usage: Ideally suited for conservative investors like corporate treasurers who prioritize safety of principal over partial extra returns.

Summary

  • ICRA & CARE: Focus heavily on Credit Quality Ratings for Debt Funds.
  • AAAmfs: The gold standard for debt fund safety.
  • Difference: These are "Safety Ratings," not "Return Rankings."
  • Volatility Ratings: ICRA V1-V5 measures interest rate sensitivity.

Quiz Time! 🎯

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