Credit quality means creditworthiness, that is, the ability to repay debt. Creditworthiness can be measured for companies of any sector, banks etc. These are on an organisational level. Even countries are given credit ratings. Creditworthiness can also be measured for individual bonds issued by such organisations. Rating types and methodologies differ for each one of them.
Credit quality in mutual funds has mostly to do with debt funds. Fund managers of debt funds invest in individual bonds of different corporates or the government of India. So the average credit quality of a debt mutual fund gives an idea of the overall credit quality of the entire portfolio.
It is mostly calculated as an average credit rating of individual bonds held by the fund relative to the size of the portfolio. There are multiple rating agencies in the market that companies approach to assessing different bonds in the market. These agencies study the credit quality of bond papers across various parameters and have a complex methodology in place that requires some level of expertise.
According to the kind of debt papers they invest in, debt mutual funds derive their names and categories accordingly. Let’s take the example of credit risk funds. Credit risk debt mutual funds are funds that invest in debt papers with lower credit rating. Bonds with lower credit quality pay high-interest rates. So the average credit quality of credit risk funds is low. Such funds usually invest 65% of their corpus in papers rated below AA.
The methodology of different rating agencies will be different but the ultimate aim is the same; to check the debt servicing ability and therefore the creditworthiness of the company through that particular bond. This ultimately helps us to gauge the average credit quality of a mutual fund. Here we will share the rating scale of two rating agencies: Crisil and ICRA. Both these rating agencies work as a division of global rating companies. While Crisil is an S&P Global company and ICRA’s “ultimate parent company” is Moody’s Investor Service. For example, Crisil AAAmf and ICRA AAAmf rating is given to long term securities which carry the highest degree of safety due to timely repayments and hence have the lowest credit risk. Like this, there are more ratings on the scale for short- and long-term securities.
We have put the rating scale of ICRA and Crisil towards the end of the article for your reference.
| CRISIL: Long Term Scale | |
| Rating | Description |
| CRISIL AAA
(Highest Safety) |
Instruments with CRISIL AAA are considered to be the safest with respect to timely debt servicing. CRISIL AAA has the lowest credit risk. |
| CRISIL AA
(High Safety) |
Instruments with CRISIL AA have a high degree of safety with respect to timely debt servicing. CRISIL AA has very low credit risk. |
| CRISIL A
(Adequate Safety) |
Instruments with CRISIL A have ‘adequate’ safety with respect to timely debt servicing. CRISIL A instruments have low credit risk. |
| CRISIL BBB
(Moderate Safety) |
Instruments with CRISIL BBB have moderate safety with respect to timely debt servicing. Such instruments have moderate credit risk. |
| CRISIL BB
(Moderate Risk) |
Instruments with CRISIL BB have moderate default risk with respect to timely debt servicing. |
| CRISIL B
(High Risk) |
Instruments with CRISIL B have high default risk with respect to timely debt servicing. |
| CRISIL C
(Very High Risk) |
Instruments with CRISIL C have very high default risk with respect to timely debt servicing. |
| CRISIL D
Default |
Instruments with CRISIL D either are in default or are expected to be in default. |
| CRISIL- Short Term Scale | |
| Rating | Description |
| CRISIL A1 | Instruments CRISIL A1 have the highest degree of safety with respect to timely debt servicing. Such instruments have the lowest credit risk. |
| CRISIL A2 | Instruments with CRISIL A2 have a high degree of safety with respect to timely debt servicing. Such instruments have low credit risk. |
| CRISIL A3 | Instruments CRISIL A3 have moderate safety with respect to timely debt servicing. Such instruments have higher credit risk as compared to above two categories. |
| CRISIL A4 | Instruments with CRISIL A4 have minimal safety with respect to timely debt servicing. CRISIL A4 instruments have very high credit risk and are prone to default. |
| CRISIL D | Instruments with CRISIL D either are in default or may be in default on maturity. |
| Long-Term Mutual Fund Schemes: | Short-Term Mutual Fund Schemes |
| CRISIL AAAmfs | CRISIL A1mfs |
| CRISIL AAmfs | CRISIL A2mfs |
| CRISIL Amfs | CRISIL A3mfs |
| CRISIL BBBmfs | CRISIL A4mfs |
| CRISIL BBmfs | |
| CRISIL Bmfs | |
| CRISIL Cmfs |
ICRA’s Long-Term Debt Fund Credit Risk Rating Scale |
|
| Rating | Description |
| [ICRA]AAAmfs | Schemes AAAmfs have the highest degree of safety with respect to receiving payments on time from the investments made. |
| [ICRA]AAmfs | Schemes AAmfs have high safety with respect to receiving payments on time from the investments made. |
| [ICRA]Amfs | Schemes Amfs have adequate safety with respect to receiving payments on time from the investments made. |
| [ICRA]BBBmfs | Schemes BBBmfs have moderate safety with respect to receiving payments on time from the investments made. |
| [ICRA]BBmfs | Schemes with BBmfs have moderate default risk with respect to receiving payments on time from the investments made. |
| [ICRA]Bmfs | Schemes with Bmfs have high default risk with respect to receiving payments on time from the investments made. |
| [ICRA]Cmfs | Schemes with Cmfs have very high default risk with respect to receiving payments on time from the investments made. |
Short-Term debt fund rating scale |
|
| [ICRA]A1mfs | Schemes A1mfs have a very high degree of safety with respect to receiving payments on time from the investments made. |
| [ICRA]A2mfs | Schemes with A2mfs have a high degree of safety with respect to receiving payments on time from the investments made. |
| [ICRA]A3mfs | Schemes with A3mfs have moderate safety with respect to receiving payments on time from the investments made. |
| [ICRA]A4mfs | Schemes with A4mfs have minimal safety with respect to receiving payments on time from the investments made. |