Understanding Mutual Fund Ratings

In: Mutual Funds & ETFs

Mutual fund ratings are third-party, category-relative scores—usually on a 1–5 scale—that summarise a scheme’s past, risk-adjusted performance and other quantitative factors. They are helpful as a first-level filter, not as a buy/sell signal, and must be read alongside SEBI’s Riskometer, the factsheet, and your goals.

Why mutual fund ratings matter

With thousands of schemes, investors need a quick way to shortlist options. Ratings compress large datasets—returns, volatility, costs, liquidity—into a simple symbol (stars/ranks). Used correctly, they save time and set a baseline for deeper research. Used blindly, they can mislead.

This guide explains who rates funds in India, what goes into those ratings, common pitfalls, and a practical way to use ratings within your selection process.

What exactly is a mutual fund rating?

A mutual fund rating is a category-relative summary of a scheme’s historical, risk-adjusted performance. For example:

Morningstar Star Rating (1–5 stars) is based on the Morningstar Risk-Adjusted Return (MRAR) calculated within each Morningstar Category and typically blends 3/5/10-year records when available. (Morningstar)
Value Research Fund Rating (1–5) combines a fund’s Return Grade and Risk Grade to yield a purely quantitative, risk-adjusted measure within category. (Value Research Online)
CRISIL Mutual Fund Ranking (1–5 ranks) is a peer-group ranking: top 10% get Rank 1, next 20% Rank 2, etc., using return/volatility and additional portfolio-quality metrics (e.g., credit quality for debt), subject to history and AUM cut-offs. (CRISIL, CRISIL)

Ratings ≠ SEBI’s Riskometer.
Riskometer is a regulatory risk label (Low to Very High) mandated by SEBI for each scheme; it does not rank funds but conveys product risk. (Securities and Exchange Board of India)

How ratings are computed (the building blocks)

Most rating models emphasise risk-adjusted returns and category comparison. Common components:

Risk-adjusted return
- Sharpe Ratio = (Return − Risk-free rate) ÷ Standard Deviation
- Sortino Ratio = (Return − Risk-free rate) ÷ Downside Deviation
  Morningstar uses a proprietary MRAR framework to penalise downside more heavily. (Morningstar)
Consistency
- Rolling-period returns; downside capture vs category; persistence of outperformance.
Costs
- After-fee return ≈ Gross Return − TER. (Higher TER often drags ratings.)
Portfolio risk/quality
- Equity: concentration, sector bets; Debt: credit quality, duration/interest-rate risk, liquidity. CRISIL explicitly incorporates such portfolio factors in its ranking for debt and hybrid categories. (CRISIL)
Eligibility & data history
- Minimum 3/5/10-year records (varies by rater) and category-wise AUM thresholds. (CRISIL)

Quick comparison: Who rates funds in India?

Provider	Scale	Core lens	Data window	Update frequency	Notes
Morningstar India	1–5 stars	MRAR within category	Uses 3/5/10-yr where available	Periodic (commonly monthly)	Backward-looking, purely quantitative star rating. (Morningstar)
Value Research	1–5	Return Grade + Risk Grade	History-based; category-relative	Periodic	Purely quantitative; no subjective overlay. (Value Research Online)
CRISIL MF Ranking	Rank 1–5	Return/volatility + portfolio factors	Requires history & AUM cut-offs	Quarterly (typical)	Top 10% = Rank 1; next 20% = Rank 2. (CRISIL, CRISIL)

Dynamic by design: A top-rated fund today may not stay there; ratings reflect changing performance and markets. (AMFI India)

Ratings vs the SEBI Riskometer

Riskometer: Mandatory product label (Low → Very High) as per SEBI’s 2020 circular; it classifies product risk, not “good/bad.” (Securities and Exchange Board of India)
Ratings: Independent, performance-based summaries relative to category peers.

Use both: pick funds whose Riskometer matches your risk profile, then compare ratings within that bucket.

How to use ratings the right way (5-step playbook)

Start with suitability.
Confirm the scheme’s category and Riskometer align with your horizon and risk capacity (e.g., equity for 5+ years). (Securities and Exchange Board of India)
Shortlist using ratings.
Prefer 4–5 stars / Rank 1–2 within the target category. Treat 1–2 stars as cautionary. (Morningstar, Value Research Online, CRISIL)
Validate the drivers.
Check factsheet for rolling returns, downside capture, TER, portfolio quality (credit/duration for debt).
Look for consistency, not one-off spikes.
Multi-period, rolling outperformance with reasonable volatility beats “hot” short-term returns.
Contextualise with qualitative checks.
Fund manager tenure, process, AMC governance, liquidity. AMFI reminds investors that past performance is not a guarantee. (AMFI India)

Deepen your research with: How to Read a Mutual Fund Factsheet, Direct vs Regular Mutual Funds, Debt Funds vs Equity Funds: Which is Safer?, What is AUM and Why It Matters (see related Endovia Wealth guides).

Common mistakes to avoid

Chasing 5-star labels blindly. Ratings are backward-looking and can change quickly. (AMFI India)
Ignoring category context. A 5-star sectoral fund is not automatically suitable versus a 4-star diversified fund.
Confusing Riskometer with rating. One shows risk, the other shows past risk-adjusted outcomes. (Securities and Exchange Board of India)
Overlooking costs. A higher TER can erode future compounding even if history looks good.
Debt-fund complacency. For debt, scrutinise credit quality and Macaulay Duration; ratings that lean on returns may not fully capture credit/event risks. (CRISIL)

Mini-toolkit: quick formulas you’ll encounter

Sharpe Ratio: Rp−Rfσp\displaystyle \frac{R_p – R_f}{\sigma_p}
Sortino Ratio: Rp−Rfσdown\displaystyle \frac{R_p – R_f}{\sigma_{\text{down}}}
Expense impact (annual): After-fee return ≈ Gross return − TER
Downside capture (%): 100×Fund return in down monthsIndex return in down months\displaystyle 100 \times \frac{\text{Fund return in down months}}{\text{Index return in down months}}

These underpin many rating frameworks, especially the emphasis on downside risk and after-fee outcomes. (Morningstar, Value Research Online)

FAQs

1) Are ratings “SEBI-approved”?
No. Ratings are independent opinions by research firms/CRAs. SEBI mandates the Riskometer but does not certify star ratings. (Securities and Exchange Board of India)

2) How often do ratings change?
They are reviewed periodically (commonly monthly/quarterly). A fund’s rank can move as returns/volatility shift or peers change. (CRISIL, Morningstar)

3) Why do some index funds have high ratings?
Because they often deliver strong, consistent, after-fee returns relative to active peers in the same category, especially with low TERs. Methodologies that reward risk-adjusted, net performance will reflect that. (Morningstar, Value Research Online)

4) Do ratings predict the future?
No. AMFI clearly states historical performance is not a guarantee and ratings are dynamic; use them as a starting point, not a verdict. (AMFI India)

A simple framework for Indian investors

Goal fit first: map category & Riskometer to your horizon and risk profile. (Securities and Exchange Board of India)
Use ratings as a filter: shortlist 4–5 star / Rank 1–2 funds within the chosen category. (Morningstar, Value Research Online, CRISIL)
Verify with the factsheet: rolling returns, downside capture, TER, portfolio changes.
Diversify and monitor: avoid concentration (one AMC/strategy).
Review annually: because ratings and schemes evolve.

Key takeaways

Ratings compress complex, past performance into a simple score; they are category-relative and quantitative. (Morningstar, Value Research Online)
SEBI’s Riskometer is separate and signals product risk, not a rank. (Securities and Exchange Board of India)
Treat a high rating as a screening tool, then dig into suitability, costs, and portfolio quality.
Remember AMFI’s warning: past performance doesn’t guarantee future results; ratings can change. (AMFI India)