Groww Mutual Fund Rating Methodology is a mix of absolute comparisons and relative comparisons with the benchmark. Unlike most others, we are not doing a relative ranking of mutual fund schemes within a peer group. Also, instead of excluding new or small schemes, we are rating them lower due to their young age or low AUM. This rating is only for open-ended regular schemes. We are rating mutual funds on a scale of 5 Stars with the lowest being 1 Star and the highest as 5 stars.
Broadly, we have divided the rating into two types:
All mutual funds other than debt and gold are considered Equity Mutual Funds like Large Cap, Small Cap, Mid Cap, Hybrid, Sector, etc. For Equity Funds, our broad Mutual Fund rating criteria are:
We are giving 40% weightage (2 stars) to this parameter. We are using three evaluation periods to assign a rating for this criteria — last 1 year, last 3 years and last 5 years’ returns compared to its benchmark. We have defined benchmarks on sub-category level (Like Nifty 50 for Large Cap, Nifty 500 for Multi Cap, Crisil Balanced Aggressive Index for Equity Oriented Hybrid funds)and hence each mutual fund in the subcategory is compared with the same benchmark. We have given different weights to each time period with the recent ones getting the highest weight like 1 year — 40%, 3 year — 35% and 5 year — 25%.
We are giving 40% weightage (2 stars) to risk parameters. We are using two parameters 1) Standard Deviation — 40% weight and 2) Sharpe Ratio- 60% weight. We are using a 5 year period to calculate both standard deviation and Sharpe. Both these parameters are benchmarked with their category to allocate a score of 0.8 and 1.2 respectively.
We are giving 20% weightage (1 star) to these parameters.
AUM is to the mutual fund as market cap is to shares. like shares. If the AUM is very low (we have floor set on sub-category level) there is a big issue in trusting the performance of that fund, so we are putting a penalty of 2 stars. Similarly, if AUM is very high (we have caps set on sub-category level) generating alpha will be difficult. Hence, we are putting a penalty of 1 star for very high AUM.
In debt mutual funds, we use a few more parameters over and above mentioned in Equity. These new parameters are combined to calculate the risk-adjusted expected Alpha (extra returns than benchmark) of debt mutual funds in future. We normalize the rating with this parameter by giving it a weight of 30% and reducing the weights of other parameters by 30%. :
We assume that the portfolio of this mutual fund will generate YTM returns in near future assuming not Alpha from trading. Higher the YTM higher can be the alpha.
It is effectively an interest rate risk. This will negatively impact the rating. Higher the MD lower will be rating.
We are using (probability of default) X (loss given default) as a proxy for risk for each rating. We use this to calculate the weighted average of risk for the scheme. Higher the Credit Risk lower will be rating.
Portfolio ratings are also done on a similar principle.
Mutual Fund Rating is a convenient composite measure of returns, risk, and other measures. The assessment does not reflect Groww’s opinion of the future potential of any fund. It only gives a quick summary of how a fund has performed historically relative to its benchmark.