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.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} 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.
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#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} (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
