Concerns about interest rates, bond auctions and an increase in industrial output weighed on investor sentiment in October, pushing bond yields higher. The yield on the 10-year 6.9% government bond maturing in 2019 increased to 7.29% from 7.19% in September. Earlier in the month, the bond market had expected the Reserve Bank of India (RBI) to end its easy money policy stance and raise interest rates in its second quarter monetary policy review on 27 October.
Higher-than-expected growth in industrial output, which rose 10.4% in August, further raised market expectations of an increase in interest rates. But RBI kept all its key rates unchanged, only raising the statutory liquidity ratio, or the proportion of deposits banks need to invest in government securities, by 1 percentage point. The bond market took comfort from data on inflation, which rose to 1.51% for the week ended 17 October against market expectations of a 1.55% rise. During the month, the mutual fund industry witnessed a 24% rise in its assets to Rs774,796 crore, with income funds receiving higher inflows after the September redemptions. Institutional investors returned to ultra short-term bond funds, pushing the income funds’ category assets by Rs151,271 crore. Liquid funds saw outflows (Rs7,344 crore) for the third month in a row as returns from this asset class have been affected by the Securities and Exchange Board of India’s new mandate of investing in papers of up to 91 days’ maturity.
The Morningstar star rating methodology is based on a fund’s risk-adjusted return denoted as Morningstar risk-adjusted return (MRAR) within a given Morningstar category. Morningstar categorizes funds based on their average holdings statistics for the past three years. Morningstar uses expected utility theory as the basis for MRAR. The expected utility theory determines how much return an investor is willing to give up to reduce risk. Therefore, MRAR gives more importance to a fund’s downside deviation. To calculate MRAR, a fund’s monthly total return is calculated. The total return is then adjusted for risk-free rate to arrive at the Morningstar return. The Morningstar return is then adjusted for risk to calculate MRAR. Morningstar uses parameter gamma to describe investors’ sensitivity to risk. Morningstar fund analysts have concluded that gamma equal to two results in fund rankings that are consistent with the risk tolerances of typical retail investors.
Morningstar risk is calculated as the difference between Morningstar return and MRAR. Morningstar rating is calculated every month for 3-, 5- and 10-year periods. The fund’s overall rating is calculated based on a weighted average of the available time period ratings. Within each rating period, the top 10% funds receive a five-star rating, the next 22.50% earn a four-star rating, the next 35% get three stars, the next 22.50% receive two stars, and the last 10% get one star. Morningstar rates each share class of a fund separately, because each share class has different loads, fees and total return time periods available. The distribution of funds among the star ratings depend on the number of portfolios evaluated within the category, rather than the number of share classes available.
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