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July 9, 2020

Mutual funds with good ratings can also perform negatively

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For the past few weeks, readers have been asking a question. His question is about such mutual funds, which were rated well by Value Research. But at the moment they are facing a problem. This is not a new thing. It has been three decades since ratings started, and since that time, readers often ask us why funds with very good ratings are doing poorly. In the case of debt funds, it has happened on several occasions that very high rated debt funds have suddenly started facing problems of credit quality or liquidity and recently this has happened with some funds.

Regarding which my answer is always simple and the same. My answer has not changed at all in the last two-three decades. It is important for readers to understand what a rating system is. How can this work for you? For what you can use it and for what you cannot. Especially for you, it is probably the most important to understand what you can not use the rating for.

First of all, the rating is purely arithmetic. It is a data-driven exercise in which all funds are tested on the same scale. In mine or value research, no opinion or judgment has any role in rating. It is needless to say that all figures are in the past i.e. months or years. We cannot know the future. So in a way the rating is an assessment of how the fund has performed in the past. It is generally believed that the past can show you the right path to the future. Sometimes this does not happen.

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