Sybbi Mfm Chap 3 Funds Selection Criteria PDF

CHAPTER 3: FUND SELECTION CRITERIA *********************** FUND RATING AND RANKINGS  Mutual Fund Rating Agencies helps to select the good one schemes for the Investors.  It helps in understanding the Fund Credit Risks.  Fund Rating Agencies Such As:-  ICRA : Investment Information & Credit Rati...

CHAPTER 3: FUND SELECTION CRITERIA *********************** FUND RATING AND RANKINGS  Mutual Fund Rating Agencies helps to select the good one schemes for the Investors.  It helps in understanding the Fund Credit Risks.  Fund Rating Agencies Such As:-  ICRA : Investment Information & Credit Rating Agency of India Ltd.  CARE : Credit Analysis & Research Ltd.  CRISIL: Credit Rating Information Services of India Ltd.  NEED & IMPORTANCE OF FUND RATING & RANKINGS 1) Assist the Investors in making informed investment decisions: provides a comparative analysis of returns. 2) Informed Guidance: Guidance to investors such as mutual fund portfolio, asset allocation & performance across scheme which assist the investors to identify the right schemes as per their financial goals. 3) Understanding of Fund Credit Risks 4) Industry watchdog: keep fund companies to depict true picture of their schemes. 5) Identifies Underperformers 6) Present Information in Simplified manner: they present the information in very concise and simple manner which help the layman investors to invest smartly.  BASIS OF RATINGS 1) Performance Based Relative Ranking: 3 years & 5 years NAV history 2) Risk and Return 3) Asset Under Management (AUM) Size 4) Asset Quality: Analyze whether the investors will get their investments back on redemption 5) Portfolio Concentration: concentration measures the risk arising out of improper diversification. They assess whether the fund house has any exposure to sensitive sector. 6) Liquidity Analysis 7) Tax Efficiency: Tax benefit to investors helps in better ratings. 8) Capital Preservation INTERPRETATION OF FUNDING RATING BY CRISIL(CREDIT RATING INFORMATION SERVICES OF INDIA LIMITED)  CRISIL MF RANKING CATEGORY DEFINITION:-  CRISIL FUND RANK 1:- Very Good Performance  CRISIL FUND RANK 2:- Good Performance  CRISIL FUND RANK 3:- Average Performance  CRISIL FUND RANK 4:- Below Average Performance  CRISIL FUND RANK 5:- Relatively Weak Performance  INTERPRETATIONS OF RATING BY CRISIL 1) Long Term Mutual Fund Schemes Rating Symbols 2) Short Term Mutual Fund Schemes Rating Symbols 1) LONG TERM MUTUAL FUND SCHEMES 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 to be in default soon 2) SHORT TERM MUTUAL FUND SCHEMES 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, Very High credit risk & susceptible to default.  A5 mf:- Default or expected to be in default soon ICRA MUTUAL FUND RATING METHODOLOGY/ICRA’s RATING APPROACH  Documents:- Prospectus, Investors reports, Internal documents etc.  Management Characteristics:- Reputation of the firm, policies & practices relating to product etc.  Fund Manager:- Professional skills & experience of fund manager  Regulatory Compliance:- ICRA also observes firm’s compliance practices along with adherence to relevant Indian rules & regulation.  Ongoing review & monitoring:- ICRA periodically reviews the fund related information to support its published rating opinions. If the portfolio credit score meets the benchmark of assigned rating, the rating is retained.  CARE RATING APPROACH  CARE fund quality ratings are based on evaluation of the funds investment strategy and portfolio credit risk. Qualitative factors examined are:-  Qualification & experience of senior management team  AMC’s Track record is examined  Credentials ( qualifications, qualities etc. indicating a person’s suitability for something) of AMC, Sponsors & Board of Trustees.  Risk Management System  Periodic Review & Monitoring  FUNDS SELECTION CRITERIA 1) Identify Investment Goals 2) Risk Tolerance:- Investors with high risk appetite may invest in mid-cap/ small-cap funds & Moderate Risk appetite may invest in Large cap funds. Debt funds are ideal for investors with low risk appetite. 3) Past Performance and Consistency 4) Investment objectives:- Whether Long term investment goals or Short term, Accordingly invest in Large cap, Midcap or Small cap Stock baskets. 5) Asset Management Charges 6) Portfolio Turnover Ratio:- Fund with a lower turnover(where buy & hold strategy is there) would incurring lesser costs(like brokerage on buying & selling). 7) Asset Management Company’s Team  PERFORMANCE MEASUREMENT: ROLLING RETURNS & BENCHMARKING  ROLLING RETURNS:- Rolling Returns displays the frequency and magnitude of an investments Good & Bad Performance Period.  Rolling Return is the Annualized Average Return for a period ending with the listed year.  BENCHMARKING:- Benchmarking is The Process of Comparing one’s business processes to Industry best or best practice from other industries.  Dimensions typically measured are Quality, Time & Cost.  BONDS  A Bond is a Fixed Income Instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).  Bonds are Long Term Debt Securities usually issued by Government entities and by Financial corporations.  Bond pays periodic payment called as Coupons. Coupon is a Annual Payout as a percentage of the Bond’s par value.  Annual Payout as a percentage of the current market price is to be refereed as Current yield. YIELD TO MATURITY ( YTM)  MEANING:- Yield to Maturity is The Rate of Return Expected on a Bond which is held till Maturity.  it helps in estimating the return generating capacity of Bond from the date of Bond Investment till its Maturity. FORMULA TO CALCULATE YTM RV or FV - PP YTM = Years to Maturity + Coupon PP + RV or FV 2 Where, FV = Redeemable Value or Face Value of the Bond PP = Purchase Price/ Current Market Price of the Bond Coupon = Interest Payment Amount