Interpreting Ratings by CRISIL
Introduction
CRISIL (Credit Rating Information Services of India Limited) is India's leading rating agency. Its mutual fund ranking methodology is considered the industry standard. CRISIL releases the CRISIL Mutual Fund Ranking (CMFR) every quarter, which is widely followed by investors and advisors. Understanding how to interpret this ranking is a key skill for any finance student.
1. CRISIL Mutual Fund Ranking (CMFR) Methodology
CRISIL ranks funds within their specific categories (e.g., Large Cap, Mid Cap, Liquid Fund) based on a composite score.
Key Parameters Evaluated:
- Superior Return Score (SRS): Measures returns relative to the risk taken.
- Portfolio Concentration Analysis: Penalizes funds that are "over-exposed" to a few stocks or sectors.
- Liquidity Analysis: Measures how easily the portfolio can be liquidated (sold) without impacting the price.
- Asset Quality (for Debt Funds): Evaluates the credit rating of underlying bonds.
- Tracking Error (for Index Funds): Measures deviation from the benchmark index.
The Ranking Scale: CRISIL assigns a rank from Rank 1 to Rank 5:
- CRISIL Fund Rank 1: Top 10 percentile (Very Good Performance).
- CRISIL Fund Rank 2: Next 20 percentile (Good Performance).
- CRISIL Fund Rank 3: Next 40 percentile (Average).
- CRISIL Fund Rank 4: Next 20 percentile (Below Average).
- CRISIL Fund Rank 5: Bottom 10 percentile (Poor).
2. Interpretation for Investors
When an investor sees "CRISIL Rank 1," what does it actually mean?
A. Relative Performance
It means the fund was in the top 10% of its peer group for that specific quarter. It does not mean it gave the highest absolute return; it means it gave the best risk-adjusted return.
B. Not a "Buy" Recommendation
CRISIL explicitly states that a ranking is not an investment recommendation. It is merely an opinion on relative past performance. It does not predict future performance.
C. Eligibility Criteria
To be ranked, a fund must meet strict criteria:
- Minimum 3-year track record (for equity).
- Minimum AUM disclosure.
- Complete portfolio disclosure to CRISIL. (This protects investors from investing in brand new, unproven funds just because of marketing hype).
3. Difference between "Credit Rating" and "Fund Ranking"
CRISIL provides two distinct services for mutual funds:
- Fund Ranking (CMFR): Rank 1 to 5. Based on performance. (Discussed above).
- Credit Rating (for Debt Funds): Example: AAAmfs.
- This rates the credit quality of the portfolio.
- AAAmfs: Highest degree of safety regarding timely receipt of payments.
- This is NOT about returns; it is purely about SAFETY.
Comparison: CRISIL Rank vs Morningstar Rating
Loading comparison…
Exam Notes: Writing the Answer
Question: "Explain the methodology of CRISIL Mutual Fund Ranking. What does 'Rank 1' indicate?" (10 Marks)
Model Answer:
Methodology: CRISIL Mutual Fund Ranking (CMFR) uses a composite score based on:
- Superior Return Score (SRS): Returns adjusted for risk.
- Portfolio Attributes: Checks for concentration risk, liquidity risk, and asset quality (for debt funds).
Ranking Scale: Funds are ranked against peers in the same category on a scale of 1 to 5.
- Rank 1: Top 10 percentile (Best).
- Rank 2: Next 20 percentile.
- Rank 3: Middle 40 percentile.
- Rank 4: Next 20 percentile.
- Rank 5: Bottom 10 percentile.
Significance of Rank 1: It indicates that the fund has historically outperformed 90% of its peers on a risk-adjusted basis. However, it is based on historical data and is not a forecast of future returns.
Eligibility: Only funds with a minimum 3-year history (for equity) are eligible to be ranked.
Summary
- CRISIL Rank: A relative performance score (1 to 5). Rank 1 is best.
- Factors: Returns, Risk, Liquidity, Concentration, Credit Quality.
- Safety Rating: Distinct from Ranking. 'AAAmfs' indicates highest credit safety for debt funds.
- Usage: Helps investors identify consistent performers in a crowded market.
Quiz Time! 🎯
Loading quiz…