Background and Range of Service
ICRA has been providing investors with independent, professional and reliable rating opinions on debt instruments of corporate entities since 1991. It has now extended its traditional rating services to include Ratings of Mutual Funds (initially Debt Funds, viz., Money Market, Gilt and Bond Mutual Funds, will be covered). The extension of service is aimed at addressing the perceived need among investors and intermediaries for an informed, reliable and independent opinion on the performance and the risks associated with investing in individual Mutual Fund Schemes.

• Performance Ratings (mf)
• Credit Risk Ratings (mfC), and
• Market Risk Ratings (mfM)1

ICRA ratings are only an opinion on the relative past-performance of a Mutual Fund scheme and the various factors that can influence its future performance. ICRA Mutual Fund Ratings are not a comment on the prospective returns, appreciation potential, or future net asset value of the rated scheme. Like all other ICRA ratings, Mutual Fund Ratings are only an opinion and not a recommendation to invest or not to invest in any rated Mutual Fund scheme.

The Benefits
ICRA Mutual Fund Ratings are designed to provide Investors, Intermediaries and Fund Sponsors/Asset Management Companies (AMCs) with an independent opinion on the performance and risks associated with various Mutual Fund schemes.

• Facilitate an informed investment decision
• Provide independent and reliable opinion on:

              *   the relative performance of the Fund
              *   the relative credit quality of the portfolio
              *   the quality of the Fund’s management and operations
              *   the relative sensitivity of the scheme to changes in
                  interest rate

• Help meet specific investment objectives

• Offer products matching the specific return-risk preferences of investors
• Enhance the marketability of various schemes
• Differentiate the various schemes from other rated/non-rated schemes using the ICRA ratings

• Provide an assessment made by an independent rating agency
• Serve as a marketing tool to differentiate a scheme from other
• available schemes
• Help meet investors’ rating requirements
• Provide for benchmarking of performance

The Rating Process
ICRA initiates the Fund Rating process on receipt of a formal request from the Fund Sponsors. The Fund is then appraised of ICRA’s information requirements and given an agenda for discussions. Subsequently, based on an analysis of the information submitted, discussions with the Fund management, and validation and cross-checking of data against in-house and other secondary research, ICRA’s team of analysts presents a detailed Rating Report to ICRA’s Rating Committee, which then assigns the rating. The rating process is highly interactive, involving discussions with the key operating personnel of the Fund.Usually, the assignment of the rating takes three to four weeks after all the necessary information has been provided. ICRA ensures complete confidentiality of the information provided and makes only those ratings public that have been accepted by the Fund management. ICRA monitors all its accepted ratings on a quarterly basis. During these quarterly reviews, the ratings may be retained or raised (up or down), on the basis of the performance of the rated scheme.

Performance Ratings
The Performance Rating (mf) of a Mutual Fund scheme is a symbolic indicator of ICRA’s current opinion on the relative performance of the scheme and the sensitivities because of the associated risks. This opinion is based on an evaluation of the scheme’s past performance and an assessment of other factors that are likely to determine its future performance. The factors that are assessed include:

• total returns suitably adjusted for past volatility (or risk) with greater emphasis on under performance
• emphasis on performance during stress
• performance benchmarking with other similar schemes
• higher weightage to past performance for schemes with longer operating history .

• Investment objective/guidelines/policies
• Quality of the Fund’s management, its investment style, systems and controls.
• Credit Risk of the scheme’s portfolio.
• Interest Rate Risk based on:

-portfolio structure with respect to time-to-maturity
-portfolio duration and convexity.
• Liquidity Risk of the scheme
• Fund’s compliance with regulations.
• Fund’s disclosure standards and accounting quality.

All accepted mf Ratings are subject to a quarterly review. A rating may be maintained or revised (up or down) on the basis of the actual performance of the scheme or other developments. Mf Ratings are only an opinion on the relative past performance of the scheme concerned and the various factors that can influence its future performance. mfC Ratings are not a comment on the prospective returns, appreciation potential or future net asset value of the rated scheme.To start with, ICRA’s mf ratings will cover only Debt Funds-Money Market, Gilt and Bond Mutual Funds-that have completed at least six months of operations.Subsequently, the scope of this service will be enlarged to include ratings of various Equity and Balanced Funds.

Credit Risk Ratings
The Credit Risk Rating (mfC) of a Debt Fund is a symbolic indicator of ICRA’s current opinion on the relative credit quality of the Fund’s investment portfolio. Specifically, ICRA ratings address the relative expected loss a Fund can suffer because of the default risk of its investment portfolio. The focus of an mfC assessment is on the downside risk. To measure the expected loss (or downside), ICRA uses its own estimates of the default risk associated with each rating category. ICRA makes its own assessment of the implicit rating of investments, which are rated or not rated by ICRA. An mfC Rating is not a comment on the future performance of the Fund with respect to price appreciation potential, volatility of the net asset value, or its yield mfC Ratings are based on an evaluation of both qualitative and quantitative factors, including:

• Published investment objective
• Fund’s investment guidelines/policies and style
• Quality of Fund’s management, its systems and controls
• Portfolio composition, its diversification and credit quality of the underlying investments
• Fund’s disclosure standards and accounting quality.

All accepted mfC Ratings are subject to a quarterly review. An mfC Rating may be maintained or revised (up or down) on the basis of the actual performance or other developments.

Market Risk Ratings
A Market Risk Rating (mfM)is a symbolic indicator of the relative sensitivity of a scheme’s net asset value and total returns to changes in the interest rate and other market conditions. mfM Ratings are forward looking and focus on the downside risk. Specifically, mfM Ratings address the extend of loss a scheme’s portfolio value can suffer because of changes, such as increase in the interest rate . An mfM Rating is a measure of the relative volatility and loss severity of a scheme, and does not attempt to predict its performance, price appreciation or yield potential. mfM Ratings are relative to the performance of other schemes with similar investment objectives and are based on an evaluation of both qualitative and quantitative factors, including:

• published investment objective
• investment guidelines/policies and style
• quality of the Funds management, its systems and controls
• credit risk of the investment portfolio
• exposure to interest rate risk, based on :

• liquidity risk
• composition and profile of investors

All accepted mfM Ratings are subject to a quarterly review. Ratings may be maintained or revised (up or down) on the basis of the actual performance of the scheme or other devlopments.