How many ratings of mutual funds are important?

Investing money in mutual funds is a  big decision an investor takes. It is an investor’s duty to know all the details about the scheme he’s going to invest, the terms and conditions, and about the interest he will earn from the investment. Mostly, when investors plan to invest their money in such schemes, confusion is created about in which company to invest when the companies offer similar schemes. The best way to avoid this confusion is to check the Mutual Fund Ratings from the mutual fund rating agencies such as Morningstar, Value Research, and ICRA.

What is Mutual Fund Rating?

Mutual Fund Rating is done to compare the schemes from different companies which offer similar schemes. It helps the investors to choose the best suitable scheme. Mutual Fund Rating agencies help the investors by rating the mutual funds based on their past performances, performance consistency, the skills of the fund’s manager, cost adjusted returns. These factors help investors to choose the best scheme for their investment portfolio.

Does Better Mutual Fund Rating mean better returns?

Investing in Mutual Funds means willing to take a risk, risk of high return. It is clear that when investors compare schemes of different companies they expect high returns. We cannot surely say that high ratings mean high returns but high ratings mean that it is obviously better than the lower ones. But sometimes there are exceptions too, lower-rated mutual funds may perform better than the high rated ones or give more returns than the schemes which are rated more. The chances of a 5 star rated mutual fund going out of rating is very low compared to a 1-2 star rated one.

Mutual Fund Ratings: A backward-looking Mechanism

Mutual Fund Ratings are basically the assessment made by the fund rating companies for investors to make better decisions. But we can say that the mutual fund ratings are a backward-looking mechanism because it might happen that a certain company was not able to perform up to the mark and may perform better next time and because of the poor performance they suffered from the ratings. There is always a scope for betterment and improvement. Mutual Fund Rating agencies also suggest the investors that their past performances are not a guarantee for the future, so it should be considered only as a filtering mechanism while they are choosing the mutual fund scheme.

Mutual Fund Ratings and Financial Goals

Whenever you go to a pharmacy or a medical shop, you don’t ask for the best medicines available right? You buy medicines according to your requirement. Similar is the case with mutual funds, one should not invest money only in the top-rated mutual funds but should invest in the categories which complete your financial goals and objectives. Choosing inappropriate funds due to ratings would be of no use rather than choosing a suitable mutual fund scheme with little low ratings.

Beyond Mutual Fund Ratings

Experts advise the investors not to consider these ratings as the sole factor for investing. They should also consider other factors likeability and stability of the fund house, if the ability of the fund house is low then it would not be a wise decision to invest in. Track record and retention should also be considered, the investor should the skills of the fund manager and the style he’s opting for investment. A strong internal investment process is one of the important factors which an investor should consider. And the integrity of the fund house should also be considered.

Mutual Fund ratings are only one factor to consider, should not be used as a benchmark. The only purpose behind ratings is to help the investors to avoid the lousy funds as indicated by the lower ratings. So, other factors should also be considered while investing and the mutual funds’ scheme.

Related Topic: How to choose mutual funds?

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