Vishal wants to buy a new car. To do this, he must be certain that this is the best purchase available. He does this by consulting his closest friends, looking up reviews online, and then making a decision. Needless to say, he made a wise choice that will serve him well for a very long time! We should all strive to purchase mutual funds similarly to Vishal. If you are a novice investor with little experience in the market, you should investigate your options and choose the best one.
Value Research, an independent mutual fund research firm, is a friend who can support us on this journey. Investors utilize the company’s “Fund Ratings,” which are released annually, as a standard when allocating assets.
We have included comprehensive information about these ratings’ meaning, methodology, and ability to assist investors in making informed decisions in this post.
Investing in mutual funds can be a daunting task, especially for first-time investors. With a plethora of options available, choosing the right fund can feel overwhelming. This is where Value Research Rating (VRR) comes in, providing valuable insights to guide your investment decisions.
What is Value Research Rating?
Value Research Rating, also known as Risk-adjusted Rating, is a quantitative metric that assesses both the returns and risks associated with a particular mutual fund. It is a composite score that helps investors compare different funds and make informed choices
Key Features of VRR:
- Quantitative: VRR is based purely on quantitative analysis, eliminating subjective biases.
- Risk-adjusted: It considers both potential returns and risks, providing a holistic view of a fund’s performance.
- Benchmarking: VRR compares funds within their respective categories, allowing investors to assess their relative performance.
How are Funds Rated?
Value Research employs a rigorous methodology to rate funds, ensuring objectivity and accuracy.
Eligibility Criteria:
- Equity and Hybrid Funds: Must have a track record of at least 3 years.
- Debt Funds: Must have a track record of at least 18 months.
- Minimum AUM: Funds with an average AUM of less than Rs. 5 crore in the past six months are excluded.
Rating Process:
- Time Period: VRR combines ratings for 3 and 5-year periods for Equity and Hybrid Funds, providing a comprehensive assessment of risk.
- Debt Funds: Rated based on 18-month weekly risk-adjusted performance.
- Category Comparison: Funds are rated relative to others in the same category.
- Risk and Return Grades: VRR assigns two grades to each fund: Risk Grade and Return Grade.
Understanding Risk Grade
The Value Research Fund Risk Grade is a quantitative measure of a fund’s potential for loss. It differs from conventional risk measures like standard deviation and beta by focusing solely on negative volatility. This means the grade reflects the possibility of underperformance and periods of loss compared to a risk-free investment.
Risk Grade Calculation:
- The fund’s returns are compared against the expected monthly risk-free return (for Equity and Hybrid Funds) or risk-free weekly return (for Debt Funds).
- The magnitude of underperformance is summed up over the relevant period.
- The average underperformance score is calculated and compared to the category average.
- Based on this relative performance, the fund is assigned a Risk Grade:
- High Risk: Top 10% of funds.
- Above Average Risk: Next 22.5% of funds.
- Average Risk: Middle 35% of funds.
- Below Average Risk: Next 22.5% of funds.
- Low Risk: Bottom 10% of funds.
Understanding Return Grade
The Value Research Fund Return Grade is a numerical score that captures a fund’s risk-adjusted return compared to other funds in its category. It considers returns adjusted for dividends, bonuses, and rights but excludes loads.
Return Grade Calculation:
- The fund’s returns are compared against the expected risk-free return.
- The total return over the risk-free return is calculated.
- The monthly average risk-adjusted return is compared to the category average.
- If the category average return is negative, the risk-free return is used as a benchmark.
- A score above one indicates outperformance compared to the category average, while a score below one indicates underperformance.
How to Use VRR for Informed Investment Decisions
VRR provides valuable insights to help you choose the right mutual funds.
Ideal Fund Characteristics:
- Low Risk Grade: Indicates lower potential for loss.
- High Return Grade: Indicates higher potential for returns.
Using VRR on ClearTax:
- Invest in direct mutual funds through ClearTax’s online portal.
- Benefit from 0% commission and potential tax savings of up to Rs. 46,800.
Additional Resources:
- Value Research Online Rating Methodology: https://www.valueresearchonline.com/fund-rating-methodology/
- ClearTax Mutual Funds: https://cleartax.in/s/mutual-funds
By understanding VRR and its components, you can make informed investment decisions and choose mutual funds that align with your risk tolerance and financial goals. Remember, VRR is just one tool among many, and it’s essential to conduct thorough research and consider your individual circumstances before investing.
For Equity and Hybrid Funds
For this type of fund, Value Research ratings aggregate ratings over two periods (3 and 5 years) to give investors a single evaluation of each fund’s risk rating in comparison to other funds in the same category.
Based on an 18-month period of weekly risk-adjusted performance, this fund type is rated in relation to other funds within the same category. For funds to be eligible for this rating, the rating mechanism has the following requirements: i For a category to be rated ii, it needs to have at least 10 funds. The company added more qualifying requirements in July 2008, excluding funds with an average AUM of less than Rs. 5 crore from the rating process (during the six months prior to the rating process).
How are Funds rated?
First of all, for equity or hybrid funds that have been on the market for less than three years, Value Research does not employ this rating system. For debt funds, this period is 18-months long. Since it is impossible to compare a fund’s past performance to that of its peers, the company does not rate or review funds without a track record.
How Does Value Research Determine Star Ratings for Mutual Funds?
FAQ
What is a Value Research rating?
What do the ratings on mutual funds mean?
Is 3 star mutual fund good?
Which 5 star mutual funds have 10 year performance?
What is value research online (VRO)?
Value Research Online (VRO) is a reputed website that gives a rating to mutual funds. In addition to giving a rating, this website also helps investor by solving their queries. Mutual funds rating of value research online is widely accepted. Mutual Funds with 5-star rating by Value Research online is considered best for investment.
What is a VRO rating?
Ans: VRO or Value Research Online rating is a grading system in which various mutual fund schemes are assigned a rating between 1 to 5 stars. A rating of 5 stars means that a fund is one of the best to invest in. Websites offering mutual fund comparison tend to provide a VRO rating to summarise the overall performance of a scheme. Before you go…
What does a 5 star rating mean?
The rating is an indication of superior risk adjusted performance of a fund in a category. If a fund really declines or turns volatile or stops delivering high returns in comparison to other funds, the fund’s rating will decline. The top 12.5% of funds on a risk adjusted scale get a 5 star rating.
Does a fund rating reflect a company’s opinion?
The rating is purely quantitative, and Value Research has clarified that there is no subjective component to their process of rating a fund. Thus, we can safely assume that the fund rating is not reflective of the company’s opinion of a fund and its future potential.