CRISIL Rating

CRISIL mutual funds rating is shown on a scale of 1 to 5 – CRISIL Fund Rank 1 being the best and Rank 5 the worst.
CRISIL Rating7
3 mins read
03-June-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.

CRISIL ratings go beyond evaluating just a company's financial health. They also analyse collective investment schemes, like mutual funds. Additionally, CRISIL rates bonds, debentures, and other debt securities. Investors can check a financial instrument's CRISIL rating, along with the issuer's rating, before making an investment decision. CRISIL helps investors choose instruments with a higher chance of good returns by considering factors that influence these returns. CRISIL credit ratings serve as a benchmark for investors to make informed investment decisions.

Understand CRISIL mutual fund rankings

CRISIL mutual fund rankings (CMFR) offer investors a valuable tool to compare the performance of different funds within a specific category. Here's a breakdown of the ranking system and key factors considered:

Ranking scale:

  • CMFR uses a scale of 1 to 5, with 1 signifying "very good performance" and 5 indicating the lowest rank.
  • The top 10% of performers within a peer group earn Rank 1, while the next 20% receive Rank 2. This percentile-based approach ensures a more objective evaluation.

Performance evaluation:

CRISIL considers several crucial aspects when assigning a rank:

  • Superior return score: This metric compares a fund's returns to its benchmark or category average, highlighting its ability to outperform its peers.
  • Optimal portfolio concentration: While diversification is crucial, excessive holdings can dilute returns. CMFR penalises overly diversified portfolios.
  • Balancing risk and reward: The analysis considers both the fund's average returns (mean return) and its volatility (fluctuations).
  • Creditworthiness assessment: Especially relevant for debt and hybrid funds, this factor evaluates the likelihood of debtors repaying their investments on time (credit quality).
  • Liquidity analysis: CMFR assesses how easily a fund can convert its holdings into cash, which impacts investor access to their money.
  • Tracking error (for Index Funds): This metric measures the deviation between a fund's performance and the index it tracks, indicating how closely it follows its benchmark.
  • Industry risk exposure: CMFR analyses the "Industry Risk Score" to gauge the potential risks associated with the sectors the fund invests in.
  • Downside risk management (Arbitrage Funds): This metric specifically assesses the potential for losses in arbitrage funds, which exploit price discrepancies between markets.

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.

What types of mutual funds are ranked?

Here are all the equity funds categories which are ranked by CRISIL:

CRISIL assesses various types of equity funds to provide rankings, including:

  • Large Cap Funds
  • Large & Mid Cap Funds
  • Flexi Cap Funds
  • Multi Cap Funds
  • Mid Cap Funds
  • Small Cap Funds
  • Value or Contra Funds
  • Focused Funds
  • ELSS (Equity Linked Savings Schemes)
  • Index Fundsd
  • Debt Funds Categories Ranked by CRISIL:

CRISIL evaluates the performance of these debt funds:

  • Gift Funds
  • Banking & PSU Funds
  • Credit Risk Funds
  • Corporate Bond Funds
  • Medium to Long Duration Funds
  • Medium Duration Funds
  • Short Duration Funds
  • Low Duration Funds
  • Ultra Short Duration Funds
  • Dynamic Bond Funds
  • Money Market Funds
  • Liquid Funds

Here is a list of hybrid mutual funds ranked by CRISIL:

  • Hybrid funds categories ranked by CRISIL:
  • Within the hybrid funds category, CRISIL assesses:
  • Aggressive Hybrid Funds
  • Conservative Hybrid Funds
  • Arbitrage Hybrid Funds

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.

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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.

How important is a CRISIL rating?

CRISIL ratings offer valuable insights into an investment's creditworthiness and potential risk. However, they shouldn't be the sole deciding factor. Consider your own risk tolerance and investment goals.

Is CRISIL rating reliable?

CRISIL is a reputable credit rating agency with a strong track record. Their ratings are generally considered reliable, but past performance doesn't guarantee future results.

Is CRISIL Rank 1 or 5 better?

Rank 1 (highest) signifies "very good performance," while Rank 5 is the lowest. Aim for higher ranks, but remember context matters. A Rank 3 fund might still be suitable depending on your goals.

What does CRISIL rank 3 mean?

A Rank 3 indicates the fund falls within the third quartile of performance compared to its peers. It's an average performer, but further research is recommended before investing.

Is CRISIL approved by RBI?

No, the RBI doesn't directly approve credit rating agencies. SEBI (Securities and Exchange Board of India) regulates CRISIL and other credit rating agencies in India.

Who gives CRISIL rank?

CRISIL, a credit rating agency, assigns these rankings based on their own analysis of various performance metrics.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.