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CRISIL Mutual Fund Ranking Methodology

Selection criteria for schemes in CMFR

Owing to changes in the categorisation /rationalisation of mutual fund schemes as prescribed by Sebi, CRISIL has increased its ranking categories in CMFR - March 2018 from 14 to 24.

1. Equity funds
Equity-oriented funds have been retained in their respective categories as defined by the AMCs.

In case of large cap, large and mid-cap, multi-cap, mid-cap, focused and value/contra categories, funds which were being ranked in different categories previously, with different historical risk-return profiles, are now part of the same category. Hence, for evaluating the performance of such a varied group of funds under one category, active returns (with respect to their appropriate CRISIL-AMFI performance indices) parameter is used instead of mean returns. Since all the funds ranked in the small cap category have come from the erstwhile small & midcap category, mean returns have been used.

Funds in the thematic - infrastructure category follow an investment objective to invest in infrastructure-related sectors. Other sectoral/thematic funds have been excluded.

Equity linked savings schemes (ELSS) invest in equity and equity-related instruments, and are aimed to enable investors to avail tax deduction under Section 80 C of the Income Tax Act.

Index funds / ETFs: Schemes launched with an objective to generate returns that are commensurate with the performance of their benchmark's total return index (TRI), subject to tracking errors, are considered.

The following will be excluded:

2. Hybrid funds

Aggressive hybrid
Schemes investing more than 65%, but less than 80% of the assets under management (AUM) in equity securities and 20-35% in debt instruments, are considered. All funds that have historically maintained the stated equity exposure (three-year average) have been included in this category.

Conservative hybrid
This category includes schemes where investment in equity is limited to 10-25% of the AUM and rest in debt instruments. Funds that have historically maintained >10% equity exposure (three-year average) have been included in this category.

3. Debt funds

In the gilt category, fundswitha mandate to manage duration dynamically are considered. Gilt funds with 10-year constant maturity are not part of this category.

In the medium to long duration category, funds with three-year average duration between 3-8 years have beenretained.

In the medium duration category, funds with three-year average duration below four years have been retained.

In the short duration category, funds withone-year average duration between 1-3 years are classified as defined by Sebi.

In the credit risk category, funds that were historically classified as credit opportunities funds in CMFR are considered. Funds with other historical classifications have been excluded.

In the corporate bond category, funds that maintained one-year average exposure >60% to corporate bonds, with the highest credit rating (i.e. AA+ and above), have been considered.

In the banking and PSU bond category, funds that maintained one-year average exposure >60% to debt instruments of banks, public sector undertakings, and public financial institutions have been considered.

In the liquid and dynamic bond categories, funds have been retained in their respective categories as defined by the AMCs.

In the low duration category,funds with one-year average duration below 1.3 years have been retained.

In the ultra short duration and money market categories, funds that were considered under the erstwhile ultra-short term and liquid categories have been retained.

Link of Sebi circular on categorisation and rationalisation of mutual fund schemes: https://www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html

CRISIL Mutual Fund Ranking Methodology

CMFRis the relative ranking of mutual fund schemes within a peer group. The basic criteria for inclusion in the ranking universe are three-year / one-year NAV history andAUM in excess of category cut-off limits,and complete portfolio disclosure. Three-year NAV history is considered across all equity, hybrid, dynamic bond, medium duration, medium to long duration and gilt categories; whereas one-year for banking & PSU, corporate bond, credit risk, short duration , low duration, money market, ultra short duration and liquid categories.

Only open-ended schemes are considered. Ranking is based on the following parameters:

Mean return and volatility

Mean return and volatility are considered as separate parameters across all categories. Mean return is the average of daily returns based on the scheme's NAV for the period under analysis and volatility is the standard deviation of these returns. While the period for analysis is three years for equity, hybrid, medium duration, medium to long duration categories; it is one year for banking & PSU, corporate bond, credit risk, liquid, and other short term categories. The period of analysis is broken into four overlapping periods(latest 36, 27, 18 and 9 months for three-year period, and latest 12, 9, 6 and 3 months for one-year period). Each period is assigned a progressive weight starting from the longest period as follows:32.5%, 27.5%, 22.5% and 17.5%, respectively.

Active return

Owing to changes in the categorisation /rationalisation of mutual fund schemes, as prescribed by Sebi from March 2018 onwards, CMFR incorporated the active return parameter in equity categories (large cap, large and mid-cap, multi cap, mid-cap, focused and value/contra) for evaluation. As funds from different categories with different risk-return profiles are in these categories, active return (with respect to their appropriate CRISIL-AMFI performance indices) is used instead of mean return. The period of analysis is broken into four overlapping periods- latest 36, 27, 18 and 9 months - and progressive weights are assigned as discussed earlier.

Portfolio concentration analysis

Concentration measures the risk arising out of improper diversification. For equity securities, diversity score is used as the parameter to measure industry as well as company concentration. In case of debt schemes, the company concentration is analysed at an individual issuer specific limit. The limit is linked with the credit rating of the issuer; a high rated issuer will have higher limits and as the rating declines the limit is reduced progressively.

Exposure to sensitive sectors

In case of debt schemes, industry concentration is analysed for exposure to sensitive sectors which are arrived based on Industry Risk Score (IRS) for various sectors. CRISIL's assessment of IRS quantifies the credit risk associated with an industry on a uniform scale to ensure comparability across industries. The score captures the influence of various industry variables on the debt repayment ability of companies in a particular sector over a 3-4-year horizon.

Liquidityanalysis

It measures the ease with which a portfolio can be liquidated. The lower the score, the better. In case of equities, it measures the number of days to liquidate the portfolio. Liquidity is calculated by taking the average portfolio liquidity score of the past three months.

Equity liquidity is computed as follows:

Liquidity score of each stock = No. of shares held / daily average trading volume of past six months

Portfolio liquidity score = Weighted average liquidity score of the above

Gilt liquidity is measured by analysing the number of days it takes to liquidate the portfolio based on turnover (volume), the number of days security is traded, and the number of trades in any security for a three-month period for that security. Corporate debt liquidity is computed by classifying each security into three categories - liquid, semi liquid and illiquid - and then evaluating a scheme's exposure to each category.

Asset quality

Asset quality measures the probability of default by the issuer of a debt security to honour the debt obligation in time.

Duration

Modified duration is considered across all the debt categories except liquid to capture the interest rate risk of the portfolio. The lower the value, the better. Going forward, Macaulay duration will be used instead of Modified duration.

Tracking error

This is used only for index schemes. The tracking error is an estimation of the variability in a scheme's performance vis-a-vis the index that it tracks. The lower the tracking error, the better.

Eligibility criteria

Parametric weights

Equity categories:

Category Large cap, large & mid cap, multi cap, mid cap, value/contra, focused Small cap, infrastructure and ELSS Index / ETFs
Active return (%) 55 - -
Mean returns (%) - 55 -
Tracking error (%) - - 100
Volatility (%) 25 25 -
Company concentration (%) 5 5 -
Industry concentration (%) 10 10 -
Equity - liquidity (%) 5 5 -
Time (years) 3 3 3

Hybrid categories:

Category Aggressive hybrid Conservative hybrid
Mean return (%) 50 50
Volatility (%) 25 10
Company concentration (%) 5 5
Industry concentration / exposure to sensitive sector (%)* 10 10
Equity - liquidity (%) 10%*K 7.5%*K
Debt - asset quality (%) 5%* (100-K) 17.5
Debt liquidity (%) 5%* (100-K) 7.5%* (100-K)
Modified duration (%) - 5
Time (years) 3 3

K = Equity component in hybrid schemes
* Inustry concentration for equity and exposure to sensitive sectors for debt portion of the portfolio

Debt categories:

Category Gilt Dynamic, medium to long, medium duration Banking and PSU, corporate bond, credit risk, short duration, low duration, money market, ultra short duration Liquid
Mean return (%) 50 50 50 50
Volatility (%) 25 10 10 10
Company concentration (%) - 5 5 5
Exposure to sensitive sector (%) - 5 5 5
Debt - asset quality (%) - 17.5 10 10
Debt liquidity (%) 15 7.5 15 20
Modified duration (%) 10 5 5 -
Time (years) 3 3 1 1

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Last updated: April 2016

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CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company / entity covered in the Report and no part of this report should be construed as an investment advice. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL's Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their Reg operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL's Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval.

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