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Mutual Fund Ratings
Background and Range of Service Mutual Funds Ratings Assigned By ICRA
The Benefits
Rating Approach
Credit Matrix
Rating Scale
Background and Range of Service
Established in 1991, ICRA has been providing investors with independent, professional and reliable rating opinions on debt instruments of corporate entities, from virtually every sector of the Indian economy. Building on this extensive accumulated experience, ICRA has ventured beyond the traditional rating service to offer a Rating for Mutual Fund Schemes. This extension of service addresses the perceived need among investors and intermediaries for an informed, reliable and independent opinion on the credit risks associated with investing in individual Mutual Fund Schemes.
ICRA’s Credit Risk rating is the culmination of an analytical process characterised by both width and depth, and drawing on the organisation’s extensive knowledge base encompassing almost every sector of the Indian economy, besides the economy itself.
Significantly, ICRA’s rating process is interactive, which allows the analytical framework to move beyond theoretical precepts and capture ground realities and softer management issues in a dynamic environment.
1. An ICRA Mutual Fund Rating is not a comment on the prospective returns, appreciation potential, or future net asset value of the Mutual Fund Scheme rated. ICRA’s Mutual Fund Ratings are only opinions and not recommendations to invest or not to invest in the Mutual Fund Schemes rated.
The Benefits
For the Investor, the Ratings:
- Facilitate informed investment decision making
- Provide independent and reliable opinion on:
- the relative credit quality of the portfolio
- the quality of the Fund’s management and operations
- Help meet specific investment objectives
For the Intermediaries, the Ratings help to:
- Provide informed advice to investors
- Offer products matching the specific return-risk preferences of investors
- Enhance the marketability of various schemes
- Differentiate (using the ICRA Rating) the various Schemes from other Rated/non-Rated Schemes
For the Fund Sponsors/AMCs, the Ratings:
- Provide an assessment made by an independent agency
- Serve as a marketing tool to differentiate a scheme from other available schemes
- Help meet investors’ rating requirements
- Provide for benchmarking of performance
Rating Approach
ICRA's analysts obtain and rely on relevant data from public and non-public sources. While this data may vary according to the type and nature of the debt fund, the following information is typically used in the rating process:
- Prospectus and related documents
- Debt fund portfolio data, including periodic investor reports and public filings
- Industry surveys, studies, and special reports
- Internal documents describing the AMC's structure, investment philosophy, decision making process, and performance track record
In addition, ICRA's encourages a continuous dialogue with the AMC's management. ICRA's analysts would normally meet with the company representatives for a discussion of the relevant factors in connection with the assignment of an initial credit risk rating, and on a periodic basis thereafter.
Credit Matrix
ICRA's Credit Matrix provides debt fund managers with investment decision flexibility. The Credit Matrix is a tool used by ICRA for analysing the investment portfolio of the debt mutual fund schemes by measuring the portfolio's aggregate credit quality, by reviewing the credit quality of each underlying debt security. The portfolio's weighted average credit quality is then measured against appropriate benchmark credit score. Separate benchmark credit scores are used for liquid and bond funds. The short-term debt funds are with weighted
average portfolio maturities of upto one year and are typically liquid/cash funds. The long-term debt funds are with weighted average maturity of more than one year and are typically bond funds. ICRA benchmarks the short-term debt funds including liquid/cash funds against a 12-month benchmark credit score, whereas the long-term debt funds are benchmarked against the long term benchmark credit score. ICRA generally assigns short-term MF credit risk ratings to short-term/liquid fund but gives an option to these funds to seek a long-term MF credit risk rating. Similarly ICRA generally assigns long term MF credit risk ratings to bond funds but gives an option to those funds with a weighted average maturity of less than 12 months to seek a short-term MF credit risk ratings.
ICRA Mutual Fund Credit Risk Ratings: Scale and Definitions
ICRA's Long-Term Debt Fund Credit Risk Rating Scale:
This scale is used to rate the underlying credit risk of debt funds portfolio on the long term rating scale
| mfAAA |
The highest-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries the lowest credit risk, similar to that associated with long-term debt obligations rated in the highest-credit-quality category. |
| mfAA |
The high-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries low credit risk, similar to that associated with long-term debt obligations rated in the high-credit-quality category. |
| mfA |
The adequate-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries average credit risk, similar to that associated with long-term debt obligations rated in the adequate-credit-quality category. |
| mfBBB |
The moderate-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries higher-than-average credit risk, similar to that associated with long-term debt obligations rated in the moderate-credit-quality category.
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| mfBB |
The inadequate-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries high credit risk, similar to that associated with long-term debt obligations rated in the inadequate-credit-quality category. |
| mfB |
The risk-prone-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries very high credit risk, similar to that associated with long-term debt obligations rated in the risk-prone-credit-quality category. |
| mfC |
The poor-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries similar credit risk as long-term debt obligations rated in the poor-credit-quality category. |
| mfD |
The lowest-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries similar credit risk as long-term debt obligations rated in the lowest-credit-quality category. |
| mfD |
The lowest-credit-quality rating assigned by ICRA to debt funds. The rated debt fund carries similar credit risk as long-term debt obligations rated in the lowest-credit-quality category. |
Notes:
For the rating categories mfAA through to mfC the sign of + (plus) or - (minus) may be appended to the rating symbols to indicate their relative position within the rating categories concerned. Thus, the rating of mfAA+ is one notch higher than mfAA, while mfAA- is one notch lower than mfAA.
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ICRA's Short-Term debt fund Credit Risk Rating Scale:
This scale applies to debt funds with weighted average maturity up to one year. Such funds would generally include liquid funds and cash funds. Benchmark maturity for this scale is 12 months.
| mfA1 |
The highest-credit-quality short-term rating assigned by ICRA to debt funds. The rated fund carries the lowest credit risk, similar to that associated with short-term debt obligations rated in the highest-credit-quality category. Within this category, certain funds are assigned the rating of mfA1+ to reflect their relatively stronger credit quality. |
| mfA2 |
The above-average-credit-quality short-term rating assigned by ICRA to debt funds. The rated fund carries higher credit risk than funds rated mfA1, with such risk being similar as that associated with short-term debt obligations rated in the above-average-credit-quality category. |
| mfA3 |
The moderate-credit-quality short-term rating assigned by ICRA to debt funds. The rated fund carries higher credit risk than funds rated mfA2 and mfA1, with such risk being similar as that associated with short-term debt obligations rated in the moderate-credit-quality category. |
| mfA4 |
The risk-prone-credit-quality short-term rating assigned by ICRA to debt funds. The rated fund carries high credit risk, similar to that associated with short-term debt obligations rated in the risk-prone-credit-quality category.
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| mfA5 |
The lowest-credit-quality short-term rating assigned by ICRA to debt funds The rated fund carries credit risk similar to that associated with short-term debt obligations rated in the lowest-credit-quality category.
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Notes:
For the short-term fund ratings of mfA1 through to mfA4, the sign of + (plus) may be appended to the rating symbols to indicate their relatively stronger position within the rating categories concerned. Thus, the rating of mfA2+ is one notch higher than mfA2.
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