BackOne Minute Guide | Star Ratings
One Minute Guide | Star Ratings
Premium
Who am i?
“Twinkle, twinkle, little star, like a diamond in the sky...." was the nursery rhyme some of us learned growing up. But back down on earth, mutual fund (MF) managers treat me as a diamond. They want me to adorn the pages of their factsheets. If you would have seen your fund’s factsheet, you may have noticed me at the top, right next to where the scheme’s name appears. I may come in a bunch of five or four stars. But when I come in a bunch of three, two or worse, one, fund managers don’t like to carry me in their factsheets.
My presence in a factsheet tells you a bit about the fund’s performance. Various MF tracking firms, such as Value Research and Morningstar, assign me to various schemes. The more the number of stars assigned to a scheme, the better the scheme is said to have performed. Typically, five stars signify best performance and one star represent worst performance. Obviously, schemes that have earned five or four stars would only want to show me off. So even though all schemes get stars, it makes sense for only the higher rated schemes to show their own star ratings.
Am i different from rankings?
Yes, and here’s how. Various schemes within a particular category are first ranked against one another in terms of their risk-adjusted returns, based on their performance in a certain time frame; for example, all diversified equity schemes within three years. However, a scheme that gets a rank of, say, eighth may not be much different or worse than one that got the seventh rank. It is possible that when the same schemes are ranked next year, the ranks get exchanged between the two schemes. How do you then determine which one is better? Here’s where I come in. MF trackers club a set of schemes ranked closer to one another and give them a single star rating. For instance, all the top 5% ranked schemes get five stars, the next 10% get four stars, the next 20% get three stars and so on. Though both rankings and star ratings are mere report cards—they talk about past performance and don’t give future projections—star ratings are a better handle while picking one scheme over another. It widens your choice of schemes and you don’t get confused by the ranks.
What do regulations say?
As per the new guidelines of the Securities and Exchange Board of India (Sebi), fact sheets that contain a scheme’s portfolio and other sundry details will now come under the ambit of Sebi’s advertisement code. It also indicated that fund houses will no longer be able to advertise any star ratings or testimonials they may have earned. But if you still wish to check your MF scheme’s star rating, you can go to any of the MF trackers’ website to do so.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
