A fund might achieve a five-star rating based on its performance over the past six months or high-risk stock bets that delivered significant returns

Should you pick funds with 5-star ratings? But remember, this does not guarantee that the fund will perform well in the future. Know how much importance you should assign to ratings while investing

Rashmi Chandra, a 45-year-old surgeon, wants to invest in an equity mutual fund for retirement. Overwhelmed by hundreds of options with minimal differentiation, she lacks the expertise to evaluate the funds on the basis of risk, asset allocation, or strategy. Attracted by the five-star ratings, she is wondering if selecting a top-rated fund will be the right approach.

Rashmi Chandra should begin by checking whether a five-star-rated fund guarantees consistent top performance. The answer is no. If a certain five-star fund were to be the best, all the rating agencies would have had the same recommendations, which is typically not the case. There are large variations in the rankings of mutual funds. Not all rating agencies and financial advisers recommend the same funds as the ‘best’ or give them ‘five star’ ratings.

Every rating agency uses a different methodology to evaluate funds. A fund might achieve a five-star rating based on its performance over the past six months or high-risk stock bets that delivered significant returns. Mutual funds’ performance can be quite volatile. Will a fund’s five-star rating guarantee its future outperformance? No, it may not. Ratings are revised on a regular basis. Hence, Chandra should choose a fund with a decent vintage so that she is able to evaluate the fund’s consistency in performance. She must probe the rating methodology to check the weightage given to consistency in performance and returns generated vis-à-vis the risk assumed.

Star ratings can be a useful starting point for shortlisting mutual fund schemes, but these should not be considered the sole deciding factor. Chandra must examine the rationale behind the ratings, consult a financial adviser, and seek clarity. This approach will ensure that her decision aligns with her risk-return preference, rather than relying solely on star ratings.

Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.

Leadership
Validating Your Startup Idea: Steps to Ensure Market Fit
By - Dr. Anu Khanchandani, Startup Coach with more than 25 years of experience
Web Development
Master RESTful APIs with Python and Django REST Framework: Web API Development
By - Metla Sudha Sekhar, IT Specialist and Developer
Leadership
Building Your Winning Startup Team: Key Strategies for Success
By - Dr. Anu Khanchandani, Startup Coach with more than 25 years of experience
Finance
Financial Literacy i.e Lets Crack the Billionaire Code
By - CA Rahul Gupta, CA with 10+ years of experience and Accounting Educator
Marketing
Digital Marketing Masterclass by Neil Patel
By - Neil Patel, Co-Founder and Author at Neil Patel Digital Digital Marketing Guru
Web Development
Intermediate Java Mastery: Method, Collections, and Beyond
By - Metla Sudha Sekhar, IT Specialist and Developer
Finance
A2Z Of Finance: Finance Beginner Course
By - elearnmarkets, Financial Education by StockEdge
Leadership
From Idea to Product: A Startup Development Guide
By - Dr. Anu Khanchandani, Startup Coach with more than 25 years of experience
Data Science
MySQL for Beginners: Learn Data Science and Analytics Skills
By - Metla Sudha Sekhar, IT Specialist and Developer
Web Development
Advanced Java Mastery: Object-Oriented Programming Techniques
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Master in Python Language Quickly Using the ChatGPT Open AI
By - Metla Sudha Sekhar, IT Specialist and Developer
Web Development
A Comprehensive ASP.NET Core MVC 6 Project Guide for 2024
By - Metla Sudha Sekhar, IT Specialist and Developer
Leadership
Crafting a Powerful Startup Value Proposition
By - Dr. Anu Khanchandani, Startup Coach with more than 25 years of experience
Artificial Intelligence(AI)
Mastering C++ Fundamentals with Generative AI: A Hands-On
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Modern Marketing Masterclass by Seth Godin
By - Seth Godin, Former dot com Business Executive and Best Selling Author
Web Development
JavaScript Essentials: Unlock AI-Driven Insights with ChatGPT
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Digital Marketing Masterclass by Pam Moore
By - Pam Moore, Digital Transformation and Social Media Expert
Artificial Intelligence(AI)
AI and Analytics based Business Strategy
By - Tanusree De, Managing Director- Accenture Technology Lead, Trustworthy AI Center of Excellence: ATCI
Office Productivity
Advanced Excel Course - Financial Calculations & Excel Made Easy
By - Anirudh Saraf, Founder- Saraf A & Associates, Chartered Accountant

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

This story originally appeared on: India Times - Author:Faqs of Insurances