What is the CRISIL Rating?

Learn what CRISIL ratings mean, how they impact your decision-making, and where to find them. Gain confidence in your investments.
What is the CRISIL Rating?
3 mins read
5-Apr-2024

Established in 1987, the Credit Rating and Investor Services of India Limited (CRISIL) is India’s first-ever Credit Rating Agency (CRA). As a CRA, the entity evaluates companies and various investment options and assigns a CRISIL rating to each of them.

Investors, financial institutions, and regulatory agencies routinely rely on these ratings to make informed decisions. Continue reading to learn more about the meaning of CRISIL ratings and how they help in making investment decisions.

What is the CRISIL rating?

The CRISIL rating is a credit rank that the Credit Rating and Investor Services of India Limited assigns to each company and investment option it evaluates. CRISIL’s assessment criteria are comprehensive and include various aspects — like the financial health of the issuer, their risk profile and prospects, risk-adjusted returns, asset quality and liquidity.

How does the CRISIL rating help in making investment decisions?

With the CRISIL rating, you can get a clearer idea of how creditworthy the company issuing a financial instrument is. You can also assess the risk associated with the said investment option.

Additionally, you can even compare the ratings of different companies and financial instruments to determine the one that suits your financial objectives and risk profile. The higher the credit rating, the better the company or financial instrument is deemed to be.

Entities issuing financial instruments often publish their ratings to attract investors. Apart from investors, financial institutions also use the CRISIL ratings to determine lending terms.

What is the CRISIL rating criteria for mutual funds?

Mutual funds are one of the various investment options that CRISIL rates. However, the rating criteria for mutual funds tend to differ from the parameters used for other investments. Here is an overview of some of the key criteria that the credit rating agency evaluates.

  • Mean return and volatility
    The mean return represents the average daily returns of the mutual fund for a particular period, whereas the volatility represents the standard deviation of the average daily returns. CRISIL primarily focuses on these two parameters when ranking mutual funds.
  • Portfolio concentration
    CRISIL ratings also consider the portfolio concentration of mutual funds. No mutual fund is allowed to invest beyond a permissible limit in any security/issuer by SEBI.
  • Exposure to sensitive sectors
    When rating mutual funds, CRISIL also factors in how different industry variables impact the creditworthiness of issuing entities. A fund that is very sensitive to industry variables is likely to have a higher credit risk.
  • Liquidity
    The ease with which a mutual fund portfolio can be liquidated is another major factor in CRISIL ratings. The lower the liquidity analysis score, the higher the fund is ranked.
  • Asset quality
    The asset quality is determined by the probability of default by the issuing entity. Mutual funds with high asset quality have a lower probability of default and are ranked higher by CRISIL.
  • Duration
    The duration is another major factor that is considered when assigning CRISIL ratings to all debt funds except liquid funds. The lower the duration, the lower the interest rate risk is likely to be.
  • Tracking error
    The tracking error represents the level of deviation in a fund’s performance relative to the index it tracks. It is used when ranking index mutual funds. The lower the tracking error, the higher the fund is likely to be ranked.
  • Count of negative returns
    The count of negative returns is a metric that represents the number of times a mutual fund has produced negative returns. The metric is used when ranking arbitrage mutual funds.

How does CRISIL rank mutual fund schemes?

CRISIL ranks mutual funds on a scale of 1 to 5 after a thorough evaluation across the many parameters explained above. The top 10% of mutual funds in a particular group are assigned CRISIL Fund Rank 1, which indicates very good performance. The bottom 10% of the funds in the same group are assigned CRISIL Fund Rank 5, which indicates poor performance.

Conclusion

The CRISIL rating is an important metric you must examine when evaluating a company or an investment option. It can give you key information such as creditworthiness and risk of default, which are both very important factors that can influence your investment decisions.

CRISIL’s mutual fund ranking system is a comprehensive ranking model that can come in very handy when evaluating various investment funds. In addition to focusing on performance, the ranking system also takes into account other key factors like asset quality, liquidity and portfolio concentration.

However, it is not advisable to solely rely on the CRISIL ratings to support your investment decisions. As a matter of fact, you must also consider other factors like your financial objectives, risk profile and investment horizon when determining the investment option that is right for you.

Frequently asked questions

Is a credit rating useful to invest in debt mutual funds?

Yes, credit ratings can be useful when investing in debt mutual funds. They help you assess the creditworthiness of the issuer and the risk associated with the debt instrument. However, you must ensure that you also account for factors other than the CRISIL ratings, such as your risk profile, tenure and investment objectives, before investing.

Does the CRISIL rating guarantee repayment?

No, CRISIL ratings do not guarantee repayment. They only serve as an indicator of the creditworthiness of the issuer and the risk of the debt instrument.

Who regulates rating agencies?

The Securities and Exchange Board of India (SEBI) is the entity that regulates credit rating agencies (CRAs).

What are some reasons for changes in credit ratings?

The credit rating of an issuer or an instrument may change from time to time. Some of the factors that prompt such a change are the issuer’s financial health, risk profile and prospects in the industry in which they operate.

What is the benefit of a credit rating for investors?

Credit ratings help investors assess the creditworthiness of the issuer and the risk associated with the investment option. Additionally, they also enable investors to compare different investment options with one another.

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