← Back to Guide

Mutual Fund Ratings and How to Read Them

Introduction

Mutual fund ratings help investors quickly assess and compare the performance, risk, and consistency of different funds. These ratings are issued by independent agencies like CRISIL, Morningstar, and Value Research. In this lesson, we will understand what these ratings mean, how to interpret them, and how they should (and should not) influence your investment decisions.

1. What Are Mutual Fund Ratings?

Mutual fund ratings are standardized evaluations based on various quantitative and qualitative parameters such as past performance, volatility, risk-adjusted returns, asset quality, and consistency.

They help you:

  • Compare funds across categories
  • Assess historical risk-adjusted performance
  • Identify consistent performers

Important Note: Ratings are not recommendations to buy or sell. They should be used as one of many inputs in decision-making.

2. Who Provides Mutual Fund Ratings in India?

  • CRISIL (Credit Rating Information Services of India Ltd.)
  • Morningstar India
  • Value Research Online (VRO)

Each agency uses its own proprietary methodology and scales to assign ratings.

3. How Ratings Are Calculated

Example: CRISIL Rating Parameters:

  • Mean Return: Average return over a specific time
  • Volatility: Standard deviation of returns
  • Downside Risk: Measures loss frequency and magnitude
  • Asset Quality: Types of securities held by the fund
  • Liquidity: How quickly the fund can liquidate its assets
Risk-Adjusted Return = (Fund Return - Risk-Free Rate) / Standard Deviation

The above formula is used to calculate Sharpe Ratio, a key element in fund ratings.

4. Rating Scales Explained

CRISIL Ratings:

  • 5 Star – Best performing fund in its category
  • 4 Star – Above average
  • 3 Star – Average
  • 2 Star – Below average
  • 1 Star – Poor performer

Morningstar Ratings:

  • Gold, Silver, Bronze – Analyst-based qualitative ratings
  • 1 to 5 Stars – Quantitative, risk-adjusted performance

Value Research Ratings:

  • 1 to 5 Stars based on risk-adjusted returns over 3-year and 5-year periods

5. How to Use Mutual Fund Ratings

  • Use ratings to filter funds within a category
  • Don’t invest solely based on a high rating
  • Combine with analysis of fund manager history, expense ratio, and AUM
  • Prefer consistent high ratings over a long period

Example: A 5-star fund that dropped to 2 stars in one year may indicate poor recent performance or increased volatility

6. Limitations of Fund Ratings

  • Ratings are backward-looking (based on past data)
  • They don’t account for changing macroeconomic factors
  • Different agencies use different methods — ratings can vary
  • A sudden market crash may not be factored into the latest rating

Hence, always do your own due diligence along with referring to ratings

7. Tools & Resources

Conclusion

Mutual fund ratings are a great starting point, but not the final word. They simplify the process of identifying quality funds but should be used along with your financial goals, investment horizon, and risk appetite. Always analyze the full picture before investing.