Who gives credit ratings to mutual funds?
Credit ratings are done by independent agencies that have no relation with the mutual fund company or its associates. Credit ratings are part of quantitative analysis and are done by various independent agencies taking into account the risk profile of the underlying mutual fund. The rating agencies use their risk based algorithms to judge the overall risk factor for each mutual fund based on the investment in various corporate papers. The ratings range from highest safety (AAA) to default (D).
What factors do credit rating agencies use to rate mutual funds?
@Meera Credit ratings are part of quantitative analysis and are done by various independent agencies. They use multiple parameters like risk profile of the underlying mutual fund and what their rating calculation algorithm suggest. It is based on number of factors like investment in various corporate papers, previous results, holdings in companies, AMC in question, the fund manager’s experience etc.
Credit Rating agencies mainly look at the composition of the Mutual Fund to determine if the fund is risky. The rating agency will also consider the frequency at which the fund manager trades and the type of securities invested in. Past performance is a very important criterion that is used to rate Mutual Funds and is often the main factor that is used to fix the rating. The fund will also be compared to similar funds in the same category to check if it is ahead of its peers. Mutual Fund ratings may not be very reliable. We suggest that you use such ratings only to eliminate funds that may not be great investments rather than using it to choose a fund to invest in.