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Equity Mutual Fund Ratings can be dangerous
The way some investors / most of the advisors select Equity Funds for investing...
Simple … check the ratings & pick the funds which are 5 star (*****) & 4 star (****) rated. Also they quit the funds which are 1 star or 2 star rated.
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What do investors expect when they invest in 5 star & 4 star rated funds?
They expect that those funds would generate maximum returns in future vis-à-vis other 3 star, 2 star, 1 star & 'Not Rated' funds.
How right or wrong is this approach?
All the Mutual Fund rating agencies / firms in India are indeed doing an excellent job. A rating gives a good idea on the fund performance on risk-adjusted parameters and various other parameters. But investors tend to ignore that these ratings are past based and 4 star / 5 star does not mean that they would be ‘FUTURE WINNERS’. Keep reading this article and you will see several instances when 5 star rated funds have underperformed vis-à-vis even 2 star rated funds. Funds with less than 3 years are 'Not Rated' & is indicated as ‘NR’. Nowhere they mention that ‘NR’ Funds should be avoided, but it is wrongly perceived by the investors that these funds are not worth investing. Investors should not just jump on to check the ratings but also should read ‘Guide to the scorecard’ wherein they explain the various parameters of rating the funds.
Judge for yourself how much should you depend on these ratings…
Following are the charts of Top 12 best performing funds & all the 5 star rated funds over last 3 years & last 1 year. Also given alongside are their ratings which they had 3 years & 1 year back.
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Best Performers |
Last 3 years |
5 Star Rated Funds |
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31/07/06 |
31/07/09 |
%Appr |
Rating
3 years
back |
|
|
31/07/06 |
31/07/09 |
%Appr |
Rating
3 years
back |
Sensex
Nifty
CNX Midcap
|
10744
3143
3878 |
15670
4636
5950 |
46%
48%
53% |
Sensex
Nifty
CNX Midcap
|
10744
3143
3878 |
15670
4636
5950 |
46%
48%
53% |
|
RIDFC Premier Equity |
9.67 |
21.47 |
122% |
NR |
SBI Magnum Contra |
28.76 |
48.30 |
68% |
***** |
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Reliance RSF - Equity |
11.45 |
23.11 |
102% |
NR |
HDFC Equity |
115.67 |
187.63 |
62% |
***** |
|
DBS Chola Oppo |
19.18 |
35.30 |
84% |
NR |
Reliance Vision |
138.85 |
213.27 |
54% |
***** |
|
Reliance Growth |
193.62 |
351.49 |
82% |
***** |
Sundaram Select Midcap |
73.22 |
105.90 |
45% |
***** |
|
DSP BR Top 100 Equity |
43.96 |
79.06 |
80% |
**** |
HDFC Tax Saver |
114.65 |
161.93 |
41% |
***** |
|
HDFC Top 200 |
87.44 |
156.61 |
79% |
**** |
HDFC Long Term Advt |
73.23 |
99.25 |
36% |
***** |
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Baroda Pioneer Growth |
24.46 |
43.79 |
79% |
NR |
SBI Magnum Global |
30.76 |
39.82 |
29% |
***** |
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Sahara Growth |
39.12 |
69.90 |
79% |
*** |
Franklin India Prima |
161.08 |
196.15 |
22% |
***** |
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Tata Equity PE |
19.53 |
34.84 |
78% |
NR |
|
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Sundaram Taxsaver |
41.07 |
73.19 |
78% |
*** |
|
UTI Dividend Yield |
12.75 |
22.70 |
78% |
NR |
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Birla SL Frontline Equity |
38.30 |
67.76 |
77% |
**** |
- Most of the top performing funds were 'Not Rated'.
- Only one 5 star rated fund features in top 12.
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5 Star Rated Funds have sizeably underperformed.
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Best
Performers |
Last 1 year |
5 Star Rated Funds |
|
|
31/07/08 |
31/07/09 |
%Appr |
Rating
1 year
back |
|
|
31/07/08 |
31/07/09 |
%Appr |
Rating
1 year
back |
Sensex
Nifty
CNX Midcap
|
14356
4333
5537 |
15670
4636
5950 |
9%
7%
7% |
Sensex
Nifty
CNX Midcap
|
14356
4333
5537 |
15670
4636
5950 |
9%
7%
7% |
|
JM Mid Cap |
15.47 |
21.76 |
41% |
NR |
DSP BR Top 100 Equity |
66.39 |
79.06 |
19% |
***** |
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Birla SL Dividend Yield Plus |
43.24 |
56.97 |
32% |
** |
Sundaram Taxsaver |
62.02 |
73.19 |
18% |
***** |
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Reliance NRI Equity |
22.98 |
29.86 |
30% |
*** |
SBI Magnum Contra |
41.06 |
48.30 |
18% |
***** |
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UTI Opportunities |
15.77 |
20.47 |
30% |
** |
Reliance Growth |
317.47 |
351.49 |
11% |
***** |
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ICICI Pru Discovery |
24.71 |
31.40 |
27% |
** |
DSP BR India T.I.G.E.R |
36.17 |
39.66 |
10% |
***** |
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HDFC Top 200 |
123.90 |
156.61 |
26% |
**** |
SBI Magnum Tax Gain |
45.06 |
49.40 |
10% |
***** |
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UTI Contra |
9.52 |
11.89 |
25% |
NR |
Kotak Opportunities |
33.98 |
36.48 |
7% |
***** |
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Sahara Taxgain 97 |
180.52 |
224.19 |
24% |
*** |
UTI Infra |
30.36 |
31.81 |
5% |
***** |
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HDFC Equity |
151.72 |
187.63 |
24% |
**** |
HSBC Equity |
82.91 |
86.41 |
4% |
***** |
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ICICI Pru Focussed Equity |
9.59 |
11.80 |
23% |
NR |
Tata Infra |
28.20 |
29.26 |
4% |
***** |
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Franklin India Flexi Cap |
19.98 |
24.37 |
22% |
*** |
Sundaram Select Focus |
72.26 |
74.51 |
3% |
***** |
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Canara Eq Diversified |
33.02 |
40.26 |
22% |
*** |
DWS Investment Oppo |
30.16 |
30.73 |
2% |
***** |
- Most of the top performing funds were rated below 2 star.
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Not a single 5 star rated fund features in top 12.
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5 Star Rated Funds have sizeably underperformed.
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Why do 5 star Rated funds underperform sometimes?
There can be one or more reasons for the above problem...
1. If it’s a Midcap fund, its outperformance might have been because of small corpus which is easy to manage. After a great show it gets 4 star or 5 star rating & comes in limelight & the whole India wants to invest in it now. Corpus swells & swells & becomes unmanageable as in case of Franklin Prima in 2005 and Sundaram Select Midcap in later part of 2006. So a 5 star rated fund thus underperforms.
2. Other reasons can be that the Fund Manager under whom the fund achieved 5 star rating leaves the fund house and not-so-efficient person replaces him. The rating never considers the future impact of this and only after sustained underperformance the rating falls. But investors invest seeing just the 5 star rating and the past performance.
To cut the long story short…
All magazines & websites show best performers based on past performance. We recommend ‘Future Winners’ based on our rigorous study & expertise to pick best performers of future. And that’s what is most important for your wealth creation as your investments are concerned with future growth & not past performance.
“Investors of today, do not profit from yesterday’s growth.”
- Jaydeep Kashikar
The Equity funds in the above charts may / may not be our current recommendations. |
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