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Questions and Answers
Which agencies are known as Fund Rating Agencies?
What is one of the main roles of Fund Rating Agencies?
Assist in making informed investment decisions
CRISIL Fund Rank 1 indicates _______ performance.
very good
What does the term AUM stand for in fund ratings?
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Which of the following constitutes a long-term mutual fund rating symbol that indicates the highest safety?
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A fund with a portfolio turnover ratio indicating high turnover incurs lesser costs.
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What does portfolio concentration measure?
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The AA mf rating indicates a ________ level of safety.
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Match the following CRISIL fund ranks with their performance levels:
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Study Notes
Fund Rating and Rankings
- Mutual Fund Rating Agencies provide assistance in selecting optimal investment schemes.
- They evaluate Fund Credit Risks to offer clearer insights.
- Prominent agencies include:
- ICRA: Investment Information & Credit Rating Agency of India Ltd.
- CARE: Credit Analysis & Research Ltd.
- CRISIL: Credit Rating Information Services of India Ltd.
Need and Importance of Fund Ratings
- Ratings help investors make informed decisions through comparative return analyses.
- Provide guidance on mutual fund portfolios, asset allocation, and scheme performance.
- Aid in understanding potential Fund Credit Risks.
- Serve as industry watchdogs to ensure fund companies accurately portray schemes.
- Identify underperforming funds.
- Information is presented in a simplified manner, making it accessible for layman investors.
Basis of Ratings
- Performance measured by historical NAV over 3 and 5 years.
- Evaluated based on risk and return metrics.
- Assess Asset Under Management (AUM) size.
- Analyze asset quality to evaluate the likelihood of investment redemption.
- Measure portfolio concentration to determine diversification risks.
- Include liquidity analysis.
- Tax efficiency contributes to favorable ratings.
- Assess capital preservation strategies.
Interpretation of Fund Ratings by CRISIL
- CRISIL uses a ranking system for mutual funds:
- Rank 1: Very Good Performance
- Rank 2: Good Performance
- Rank 3: Average Performance
- Rank 4: Below Average Performance
- Rank 5: Relatively Weak Performance
Long-Term Mutual Fund Rating Symbols
- AAA mf: Highest degree of safety
- AA mf: High level of safety
- A mf: Adequate level of safety
- BBB: Moderate degree of safety
- BB: Moderate risk of default
- B: High risk of default
- C: Very high risk of default
- D: Default or expected default soon
Short-Term Mutual Fund Rating Symbols
- A1 mf: Highest degree of safety
- A2 mf: High/strong degree of safety
- A3 mf: Moderate degree of safety
- A4 mf: Minimal degree of safety with very high credit risk
- A5 mf: Default or expected default soon
ICRA Mutual Fund Rating Methodology
- Reviews documents such as prospectuses and investor reports.
- Assesses management characteristics, fund manager experience, and company reputation.
- Considers regulatory compliance and ongoing monitoring of fund-related information.
CARE Rating Approach
- CARE ratings focus on the evaluation of investment strategies and portfolio credit risk.
- Examines factors like management team qualification, AMC track record, and risk management systems.
- Regular reviews and monitoring of fund performance are essential tools.
Fund Selection Criteria
- Define clear investment goals to guide decisions.
- Understand individual risk tolerance; higher tolerance leads to mid-cap/small-cap investments.
- Analyze past performance for consistency.
- Align investment objectives with fund types (large, mid, small cap).
- Consider asset management charges and their impact on returns.
- Assess portfolio turnover ratios to minimize transaction costs.
- Evaluate the competence of the Asset Management Company’s team.
Performance Measurement: Rolling Returns & Benchmarking
- Rolling Returns demonstrate the consistency of an investment's performance over time.
- Shows the frequency and degree of both positive and negative performance periods.
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Description
Explore the essential criteria for selecting mutual funds in Chapter 3. This quiz focuses on understanding fund ratings and rankings from various rating agencies, including ICRA, CARE, and CRISIL. It emphasizes the importance of these ratings in assisting investors in making informed decisions.
