Investors and financial advisors often use the mutual fund ratings of valueresearchonline.com & moneycontrol.com to identify the top mutual funds for investments. It has been assumed that both the web portals are doing very good research and due diligence before giving the ratings.
We have tried to do an analysis on the ratings of both the companies and have tried to verify if it makes sense to have blind faith in them. The analysis is as under:
Value Research Ratings
Our research shows that in November 2010, valueresearchonline.com had rated 53 funds across all categories with 5 Star (highest rating). But as on April 2013, if we check the rating of the same funds, only 16 funds were able to maintain their 5 star rating status, rest were downgraded to 4 star, 3 star & even 2 star. In these two & half years, the average rating is down from 5 to 3.7. The probability is much higher that your chosen 5-Star fund in 2010 might no longer be holding that status.
Our research shows that in April 2010, moneycontrol.com had rated 45 funds across all categories with 5 Star (highest rating). But as on April 2013, if we check the rating of the same funds, only 3 funds were able to maintain their 5 star rating status, rest were downgraded to 4 star, 3 star, 2 star & even 1 star. In these two & half years, the average rating is down from 5 to 3.3.
Examples of downgrade:
The above analysis clearly shows that both valueresearchonline.com and moneycontrol.com have failed in identifying the top mutual funds for investment.
On further analysis, we realized that the problem with these rating companies is that they are giving very high weightage to the performance of recent past and are ignoring various other parameters which should be used for rating.
It is advisable for all the investors and financial advisors to use mutual fund rating for initial screening criteria and use following additional parameters to identify the winners of tomorrow:
1) Track record – Funds should have a minimum track record of 5 years.
2) Consistency of performance – The fund should have consistently performed in every financial year. 1 or 2 good years in total of 5 years doesn’t mean that fund is good for investment.
3) Minimum corpus of 1000 Crores – Good corpus ensures that expense ratio is not on the higher side and also reduces the risk of price fall because of redemption pressure.
4) Quality of Mutual Fund House – Funds of top 10 Mutual Fund houses (AMC) in terms of assets (AUM) should be chosen.
5) Quality of Fund manager –Fund Manager should have good background and should have performed consistently in the past.