This project has been a great learning experience for me. But the analyses that are carried onward these pages are really close to my heart. After taking a look at the data presented below, an expert might underestimate my efforts. One might think it as a boring task and can go for recording historic NAVs since last 1 month instead of recording it daily.
But frankly speaking, while tracking the NAVs, I really developed some sentiments with these funds. Really the ups and downs in the NAVs affected me as if I m tracking my own portfolio. The portfolio consists of different types of funds. We can see some funds are 5- star rated but
their performances are below the unrated funds. We can also find some funds which performed very well initially but gradually declined either in short- run or long run. Some funds have high NAVS but the returns offered are low. We can also see some funds following same benchmark and reflecting diverse NAV and returns. Even it can be seen that the expense ratios for various funds varies which may affect the ultimate return.
Now before going into details, lets have a look at those funds: in this downgrading equity market, we can easily make out that the 1 year return of the fund that was on 17th of april could not be sustained till 1 month. One can sort out that the present return of funds has decreased a lot and subsequently its NAV too has come down. All the funds are showing negative returns for the last 1 month. Even the two hybrid funds are showing negative monthly returns. That means all those who bought these funds a month back must be experiencing a negative return. Although the annual return of the funds have gone down in comparison to what it was offering a month back. Still the total return is positive. On an average the equity funds are offering a return of 30% annually, inspite of a week equity market.
Now checking the validity of funds’ ratings, we can see that some of the funds are 5 star or 4 star rated but their returns lag behind the unrated funds. Although, since the ratings include both risk and return so it will not be a total justice to judge the funds purely on a return basis but still we can go for it just to judge them on the basis of returns generated.
Looking at the funds, we have three 5 star rated funds, one 4star rated and six unrated funds. In other way, we have seven equity diversified funds, one equity specialty, one hybrid: dynamic asset allocation and one hybrid: debt oriented fund. It is not possible to compare each and every fund in details. So I have compared 2 funds out of this list on the basis of their returns and expenses.
Here DBS Chola opportunities and ICICI Pru infrastructure follows the same benchmark S&P CNX NIFTY. In this case, DBS Chola opportunities is a 4 star rated fund whereas ICICI Pru infrastructure is an unrated fund. The star rating definitely gives DBS a competitive advantage but now lets have a look at other factors, we can see that ICICI Pru has really performed worse in the last month. Its 1 month return is -5.8% whereas DBS gave a return of -3.07%. Even if we consider 6 months return or yearly returns, definitely DBS is a winner. We can easily spot the difference by change in their rankings even. Considering 1 yr return, we can spot DBS at no.5 whereas ICICI at no.6 but when we look at the monthly ratings, to our ultimate shock, DBS is at 52 and ICICI far behind at 172. But if we look at the yearly returns, then there is not much difference between them, DBS offering returns of 35.17% whereas ICICI offering 34.27. But looking at the expenses, the expenses charged by ICICI is lower to that of DBS, which may act as the ultimate factor in choosing the fund in a long run.
Thus at last we can conclude that ratings are totally irrelevant for investors. Here is why they are totally irrelevant to investor:
1. Mutual fund ratings are based on the returns generated, that is, appreciation of net asset value, based on the historical performance. So they rely more on the past, rather than the current scenario.
2. As returns play a key role in deciding the ratings, any change in returns will lead to re- rating of the mutual fund. If you choose your mutual fund only on the basis of rating, it will be a nuisance to keep realigning your investment in line with the revision of the ratings.
3. The ratings don’t value the investment processes followed by the mutual fund. As a result, a fund following a certain process may lose out to a fund that has given superior returns only because it has a star fund manager. But there is a higher risk associated with a star fund manager that the ratings don’t reflect. If the star fund manager quits, it can throw the working of a mutual fund out of gear and thus affect its performance.
4. The ratings don’t show the level of ethics followed by the fund. A fund or fund manager that is involved in a scam or financial irregularities won’t get poor ratings on the basis of ethics. As the star ratings look at just returns, any wrongdoing carried out by the fund or fund manager will be completely ignored.
5. Ratings also don’t consider two very important factors: transparency and keeping investors informed. There are no negative ratings awarded to the fund for being investor-unfriendly.
6. Ratings don’t match the investor’s risk-appetite with their portfolio. As a matter of fact, investments should be done only after considering the risk appetite of the investor. For example, equities may not be the best investment vehicle for a very conservative investor. However ratings fail to take that into account.
Ratings should be the starting point for making an investment decision. They are not the be all and end all of mutual fund investments. There are other important factors like portfolio management, age of funds and more, which should be taken into account before making an investment.