CRISIL Mutual Fund Ranking Methodology

Methodology

CRISIL Mutual Fund Ranking is the relative performance ranking of the mutual fund schemes within a category for the peer group. Schemes in the ranking categories which satisfy the following criteria are included in the ranking:

5  Rankings in all quarterly Ranking over the 5 year time frame for the Consistent Mutual Fund Performers category

The performance of the schemes is measured on the following criteria, depending upon the category to which they belong.

CRISIL Mutual Fund Ranking Category Definitions

Detailed methodology available on our website www.crisil.com

* If the top 10 percentile figure is not an integer, the same is rounded off to the next integer. The same approach is adopted for CRISIL Fund Rank 2 (11th to 30th percentile), CRISIL Fund Rank 5 (last 91st to 100th percentile) and CRISIL Fund Rank 4 (71st to 90th percentile) clusters. The residual schemes in the universe are placed in the CRISIL Fund Rank 3 cluster

1.1 Return and Risk Analysis

Superior Return Score

The Superior Return Score (SRS) gives the relative measure of the return and the risk for the schemes within the peer group. For computation of SRS, daily return of the scheme within the peer group is calculated for all the days covered for analysis. The daily average of this return is the peer average return for the schemes. In the next step, the difference between daily peer average and the scheme daily return is calculated. This is the differential return series for the scheme. The average return divided by the standard deviation of the differential return is the Superior Return Score.

For Large Cap Oriented Equity, Diversified Equity, Small and Mid Cap, Thematic - Infrastructure Funds, ELSS, Balanced, Debt, MIP (Aggressive & Conservative) and Gilt-Long schemes, the SRS is computed for two years on the daily NAV.

The three-year period of analysis is broken down into quartile of nine months each. The SRS score for the earliest nine month period is given the lowest weightage with the weightage progressively increasing and becoming the maximum for the most recent nine months period.

In case of the Consistent Mutual Fund Performers for Equity, Balanced and Debt categories, the SRS is calculated for a period of five years, with separate one year periods weighted differentially with the most recent period having the highest weight.

The SRS for all the schemes within the category are scaled to the best score. The top performer gets a score of 1 and others get performance scores in relation to the category top performer. The scheme with the highest score is ranked one, while others are ranked in the descending order.

Mean Return & Volatility

For Debt Short, Ultra Short Term Debt, Ultra Short Term Debt Institutional & Ultra Short Term Debt Super Institutional, Liquid, Liquid Institutional & Liquid Super Institutional categories, mean return for each scheme and volatility is taken rather than superior return score.

Mean return is calculated by taking average of daily returns for the last one year period. Standard deviation of this daily return series is taken as a measure of volatility. The period of analysis has been broken down into quartile of three months each. The earliest three month period is given the lowest weightage with the weightage progressively increasing and becoming the maximum for the most recent three months period.

In case of the Consistent Mutual Fund Performers for the Liquid category, Mean Return and Volatility are calculated for a period of five years, with separate one year periods weighted differentially with the most recent period having the highest weight.

Tracking Error

Tracking Error is a measure of divergence between the scheme and the benchmark's Total Return Index (TRI)

The first step in ranking Index Schemes involves calculation of the daily return for the scheme and the benchmark TRI of the scheme. The daily differential return series for the benchmark TRI and the scheme is then calculated. Standard deviation of the daily differential return series is called tracking error. The lower the tracking error, the closer is the performance of the scheme to its benchmark. The lower the tracking error of the scheme, the better is the ranking assigned. The tracking error has 100% weightage while ranking Index Schemes in CRISIL Mutual Fund Ranking.

1.2 Downside Risk Probability (DRP)

DRP measures the probability of the investment getting lower returns that short tenor risk free securities. Risk free return is the 91-day T-Bill yield over the period. DRP is used as a parameter in case of, For Ultra Short Term Debt, Ultra Short Term Debt Institutional & Ultra Short Term Debt Super Institutional, Liquid, Liquid Institutional & Liquid Super Institutional Funds.

1.3 Concentration Analysis

Concentration is measure of the relative proportions of different securities in a portfolio. Concentration is included as a separate criterion because the Indian financial markets are still evolving and is yet to attain depth, maturity and have an empirical base of market cycles. The industry and company concentration scores of the scheme are measured separately.

This parameter is applied in all categories except Gilt Funds.

Industry Concentration

Industry Concentration in case of equity securities is measured by means of Diversity Score. The calculation of Diversity score is shown in the table below:

For debt papers in Balance, MIP (Aggressive & Conservative), Income Funds & Income - Short funds, sensitive sectors have been identified by CRISIL. Any exposure / over exposure to these sectors would be suitably penalised.

Company Concentration

Company Concentration in case of equity securities is measured by means of Diversity Score. The calculation of Diversity score is shown in the table below:

Debt papers in Balance, MIP (Aggressive & Conservative), Debt, Liquid, Liquid Institutional, Liquid Super Institutional, Ultra Short Term Debt, Ultra Short Term Debt Institutional & Ultra Short Term Debt Super Institutional fund categories will have an individual issuer specific limit of 10.0%. This has been done to capture the additional risk being taken by investing higher proportions in an individual company's debt paper.

Cash, CBLO and net receivables

The other key parameter of actively managed mutual fund behavior that affects unit holders is cash reserves as it involves an opportunity cost. Exposure above 15% will be penalized in case of equity and hybrid funds. In case of Income schemes the limit is 10%, with the exception of the Income-Short category where it is 20%. Gilt and Liquid funds have been exempted from this criterion.

1.4 Liquidity Analysis

Large Cap Oriented Equity, Diversified Equity, Small and Mid Cap, Thematic - Infrastructure Funds, ELSS, Balance & MIP (Aggressive & Conservative) Funds

Liquidity measures the ease with which an investor can convert an investment to cash without negatively impacting either capital or return. It is measured by taking the weighted average of impact cost of securities in the portfolio.

Gilt Funds- Liquidity

Liquidity in case of Gilt Funds will be based on 3 parameters with the following final weightage

In all the three parameters adjustment will be made for securities which were issued recently.

Debt Liquidity

Debt liquidity is computed for debt funds, short term funds, liquid funds and Ultra Short Term Debt funds and debt component of hybrid funds. The Liquidity of Gilt and corporate debt parts are calculated separately. Total liquidity is computed by combining the gilt and corporate liquidity score using the gilt-corporate debt adjustment factor.

1.5 Asset Quality

Debt, Debt-Short, MIP (Aggressive & Conservative), Liquid, Liquid Institutional, Liquid Super Institutional, Ultra Short Term Debt, Ultra Short Term Debt Institutional, Ultra Short Term Debt Super Institutional, Gilt and Balance Funds: In the case of debt portfolios, Asset quality is a factor of default / migration statistics arising out of credit risk history maintained by CRISIL. So here asset quality of a scheme based on asset mix will be calculated as under:

Where X % are the default / migration statistics from CRISIL historical behavioral data on various classes of debt papers. Total asset quality score is obtained by summing up all the category scores.

1.6 Asset Size

It refers to the net investible funds of the mutual fund schemes. A higher asset size indicates a better ability of the AMC to meet large inflows/outflows from the scheme without impacting the existing investors. Hence larger the asset size, better the rank. This parameter is considered only for Ultra Short Term Debt, Ultra Short Term Debt Institutional, Ultra Short Term Debt Super Institutional, Liquid, Liquid Institutional & Liquid Super Institutional categories.