Groww’s Rating Methodology is a mix of absolute comparisons and relative comparison 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 the scale 5 Star from lowest being 1 Star and highest as 5 star.

Broadly, we have divided the rating into two types:

Equity Mutual Funds Rating

All mutual funds other than debt and gold is considered Equity Mutual Funds like Large Cap, Small Cap, Mid Cap, Hybrid, Sector, etc. For Equity Funds, our broad rating criteria are:

Returns

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 year and last 5 years returns compared to its benchmark. We have defined benchmark 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 sub category is compared with the same benchmark. We have given different weight to each time period with recent one getting the highest weight like 1 year — 40%, 3 year — 35% and 5 year — 25%.

Risk

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 out of 0.8 and 1.2 respectively.

Age, Expense Ratio, and AMC

We are giving 20% weightage (1 stars) to these parameters.

  1. Age (50% weight): We using sub-category level age criteria and broadly higher age gets a higher score and lower age get a lower score.
  2. Expense Ratio(30% weight): We using sub-category level age criteria and broadly higher age gets a higher score and lower age get a lower score.
  3. AMC (20% weight): Broadly, larger the AMC in terms of AUM higher score it gets and lower AUM AMC will get a lower score.

Asset Under Management (AUM)

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 difficult. Hence, we are putting a penalty of 1 star for very high AUM.

Debt Mutual Funds Rating

In debt mutual funds, we use few more parameters over and above mentioned in Equity. These new parameters are combined to calculate 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 weights of other parameters by 30%. :

Yield to Maturity (YTM)

We assume that 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.

Modified Duration (MD)

It is effectively interest rate risk. This will negatively impact the rating. Higher the MD lower will be rating.

Credit Rating

We are using (probability of default) X (loss given default) as a proxy for risk for each rating. We use this calculate the weighted average of risk for the scheme. Higher the Credit Risk lower will be rating.

Portfolio ratings are also done on similar principle.

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.