Quarterly review – Which fund ratings have changed in Prime Ratings?

Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

It’s the end of our second review cycle, for the April-June 2020 quarter. The updated ratings have now been published. So we’d like to highlight some trends we’re noticing in fund performance, changes in some key fund ratings and why they happened. We’ll be discussing only those categories/funds which need a mention in terms of significant changes.

Before we move into discussing the changes, please not the following:

  • Our fund ratings should not be construed as a recommendation. They simply tell you where your funds stands vis-à-vis peers and whether there is any improvement or slippage I the fund’s performance.
  • Our MF Review tool is our recommendation of  buy/hold/sell on funds. This looks at both quantitative and qualitative factors. We have updated our Review tool. We will be covering key changes in our review this week.

Briefly, some broad trends we’re seeing during our ratings review are:

  • Some large-cap funds are closing the gap with the Nifty 100 TRI or moving above it in the past couple of months, owing to their ability to contain downside better.
  • Value funds saw a turnaround as some of their value picks moved up after the March correction and recent rally.
  • Among hybrid funds, aggressive hybrid funds are becoming less consistent in performance with funds moving up or moving down in ratings but unable to sustain such moves. Dynamic asset allocation funds have begun using derivatives to good effect.
  • Money market funds, which had come to the top as CPs and CDs saw coupons move up earlier, are now giving way to ultra-short/low duration funds as their holdings are now assimilating lower rates.
  • Credit risk remains masked in many funds as fund returns have been strong with no credit event impacting performance. Risks are now also taking the form of higher concentration in some funds as they dealt with increased redemption in the past 3 months.

Large-cap funds

That this category is struggling to beat the Nifty 100 index is not new. However, the market crash earlier this year saw many large-cap funds contain losses better than the index with the result that some funds have seen their returns catch up with the index. Whether this trend sustains needs to be watched in the coming quarters.

Improved ratings: Among funds, Canara Robeco Bluechip moved up another notch to a 4.5 rating; the fund rating scored a 3 star in the December quarter. From lagging the Nifty 100 TRI, the fund has been beating the index from late 2019 onwards. Lower-than-average volatility and better-than-average alpha also helped. BNP Paribas Large Cap is another fund that has managed to climb back from a steep lag, moving now to a 3.5 star rating.

Falling ratings: While some funds saw their fund ratings change, the earlier large and popular funds are still languishing. These funds continue to underperform, and showcase higher volatility and poor downside containment, even as the ones mentioned above moved forward.

Aditya Birla SL Frontline Equity slipped further to a 1.5 star rating, to join Franklin India Bluechip. SBI Bluechip dropped from a 3 star rating to 2.5 stars, along with Nippon India Large Cap which is now 2.5 star from 4 stars in December 2019. HDFC Top 100, which had held above 3 stars earlier has however slipped to 2 stars.  

buy hold sell

Focused funds

We rate focused funds based on their overall market cap tendencies/ mandate as either large-cap or multicap. These funds have shone in the multicap rating set as several have moved up in the ratings. Several funds from this category, that were lagging the Nifty 500 TRI last year, have bounced back better than other diversified peers. Their strategy of focusing only a handful of stocks, and ability to quickly shift around holdings appear to have helped them counter the market fall.

Improved ratings: Motilal Oswal Focused 25 moved to a 4 star rating, on improving consistency and downside containment. Similarly, Principal Focused Multicap rose a notch up to 4 stars, reflecting an improving performance. SBI Focused Equity moved to a 5 star rating as it quickly shifted to large-caps to stymie market fall, and it kept risk-adjusted returns well above average.

Value funds

As with focused funds, we club value funds based on portfolio orientation into the relevant market-cap category. Currently, value/contra funds are rated along with multi-cap funds in order to correctly gauge performance. And value funds look to be making good some of their miserable performance. Here, we’re referring to SEBI-defined value category funds plus those belonging to multi-cap and other categories, but which follow a value approach.

In the past three months, with sectors such as pharma, auto, and cement doing well, value funds which had latched on to these beleaguered sectors have done well. The recent market rally has also been relatively broad-based, picking up many individual stocks.

Having said that, very few value funds have moved up in our ratings. This is because other funds such as focused or those with blended strategies too kept up performance. The result is that the relative fund ratings for most value funds have more or less stayed where they are.

With sectors such as pharma, auto, and cement doing well in the recent market rally, value funds which had latched on to these beleaguered sectors have recouped some of their performance lag.

Even so, that value funds have begun to recover lost ground and have participated well in the market does offer comfort. It also reinforces the need to have different style blends in a portfolio; should value cement a comeback and growth stay put, an all-growth portfolio may lose out.

Improved/stable ratings: UTI Value Opportunities was already slowly clawing back; its rating stands now at 3 stars. HDFC Capital Builder Value and Nippon India Value have held on to their 3-star rating. The table below gives other examples of funds where ratings have been stable.

Falling ratings: Funds that slipped on ratings include L&T India Value, dropping a notch to 2.5 stars. Aditya Birla SL Pure Value, already low at 1.5 stars before, went even lower to a 1-star rating.

Aggressive hybrid funds

Most aggressive hybrid funds appear to have given up their tendency to go into mid-caps and small-caps. Those that scored on containing downsides ever since the end of the 2017 bull run have remained at the top.

Falling ratings: Here, HDFC Hybrid Equity, a fund that been among the best for years has taken a blow to drop down to 3.5 stars thanks to its top few stock holdings lagging the Nifty 50, its higher-than-average volatility and poorer downside containment. Aditya Birla SL Equity Hybrid 95 fell a notch to 2.5 stars, owing to continued underperformance, higher mid-cap/small-cap share and poor risk-adjusted returns.

prime funds

Debt funds with very short durations

We put several categories together when looking at very short-term debt funds – money market, ultrashort, etc. This is because portfolios and instruments they invest in are very similar and serve similar timeframes, and therefore need to be seen together.

In this set, low duration funds had rarely made it to the higher ratings as most had high credit risk. This apart, the strong performance of money market instruments post the 2018 debt credit crisis helped these funds maintain a higher rating. This is now changing with some money market funds slipping as yields drop in shorter-term commercial papers and bank CDs. Funds with short-term bonds have managed to lock into better yields and have fared better.

Fund ratings should not be the only criteria to pick funds – please use our MF Review Tool to know what to do with funds, as ratings can mask some risks in a fund’s portfolio especially in debt funds.

Improved & stable ratings: Aditya Birla SL Savings, Axis Treasury Advantage and ICICI Pru Savings have improved one notch, from 4 to 4.5 stars for the former and 3.5 stars to 4 stars for the latter two. Higher-than-average portfolio yields and improving returns have led these funds to a rating improvement.

Franklin India Savings has retained its top rating. The fund had a quality portfolio, even as other funds from the AMC took on extreme credit risk. It built up cash exposure to handle redemptions that stemmed from the closure of the AMC’s other debt funds. Its returns are still above the category average. It still has a reasonably good AUM. However, the cash build up has led to concentration in a few papers, even though these are high-quality names. We’ll cover this fund in more detail in our Prime Funds review later this week.

As we have said before, fund ratings should not be the only criteria to pick funds – please use our MF Review Tool to know what to do with funds. ICICI Pru Savings fund mentioned above, for example, has some exposure to lower-rated papers.

Short duration and banking & PSU funds

In this category, banking & PSU funds still rule the top few funds, as the yield rallies in their PSU holds help. But with short-duration funds also taking to gilt exposure to ride the rate cycle, many have kept pace and in some cases even beaten banking & PSU funds.

Improved ratings: Axis Short Term Debt has moved up from 3 stars to 4 stars over the past three rating cycles. Canara Robeco Short Duration has also moved to 3 stars from 2.5 stars. Apart from improving returns, the comparatively poorer performance of some other banking & PSU funds helped these funds kick ratings up.

Corporate bond & medium duration funds

Corporate bond funds, like short-term funds, have used the yield rallies to their advantage. Along with their better-quality portfolios, corporate bond funds beat medium-duration funds, the debt category they are comparable with.

Improved ratings: Nippon India Prime Debt zoomed to a 5-star rating thanks to a high portfolio yield, high risk-adjusted return, and improving consistency against peers. However, as said above, ratings alone can mask portfolio risks. In this case, the fund has both concentration in top papers as well as some credit risk as corporate bond funds can have up to 20% of their portfolio in papers outside AA+/AAA. Use our review tool for our calls on funds. IDFC Corporate Bond is another fund whose steadily improving performance, top-quality portfolio and deft managing of portfolio maturity has helped it climb up to a 4 star rating from 3 stars.

Falling ratings: Aditya Birla Sun Life Corporate Bond dropped one notch to 4.5 stars as Nippon Prime Debt’s higher yields and returns pushed it higher and took the ABSL fund’s place. As such, there is no change in the performance and quality of the ABSL fund. Among other funds to see a rating fall, HDFC Medium Term dropped from 3 stars to 2.5 stars while DSP Bond slid to 1.5 stars from 2.5 stars.

Corporate bond funds and short-term funds have used the yield rallies to their advantage.

Gilt funds

Constant maturity funds still score at the top for the gilt fund category. Their better returns and better consistency compared to other funds keep them at 3 stars or above. SBI Magnum Constant Maturity and IDFC G-Sec Constant Maturity hold the top 5-star spots with ICICI Pru Constant Maturity Gilt a bit further down at 4.5 stars.

AMC trends in fund ratings

Sometimes, due to process changes, fund manager changes, investment philosophy and strategy changes and the like, funds across an AMC begin to improve. We’ve begun noticing the following trends here:

  • DSP AMC is seeing improvement in many of its equity funds – DSP Small Cap, for example, has steadily improved rating in the past 3 quarters. DSP Focus and DSP Equity have also improved on beating the market.
  • BNP Paribas AMC’s equity funds, in the large-cap and mid-cap space, and to some extent in multi-cap are improving.
  • Axis AMC’s debt funds are beginning to improve from the middle-of-the-road funds they were earlier. Some funds have already been highlighted above.
  • SBI AMC’s debt funds have also tended to remain at 3 stars and above in most categories, while other AMCs have funds across the rating spectrum.

P.S: We will be writing about key changes in our buy/hold/sell recommendations, updating our fund recommendation Prime Funds, our ETF recommendations Prime ETF, and our readymade portfolios Prime Portfolios in the coming days as our review cycle completes. Please note that all the reports on these changes are available only for subscribers. More reason for you to subscribe today!

Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail contact@primeinvestor.in.  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

7 thoughts on “Quarterly review – Which fund ratings have changed in Prime Ratings?”

    1. Hello Sir, Not all the changes can be covered as it would mean writing abotu several dozen funds. If it is significant we have covered it. thanks, Vidya

  1. Nanda Kumar Rajaram

    Does these changes reflected in Prime Funds/Best Mutual Funds page as well ? For example: Nippon India Prime Debt rating has increased but I don’t see it added to Prime Funds/Best Mutual Funds page ?

    Best Mutual Funds is the page I goto when I want to choose where to invest given the investment horizon + class of fund (Equity/Debt/Hybrid).

    Should I not be going be going to Best MF page, and use the only the Review Tool ?
    (I am confused with your statement: “Our MF Review tool is our recommendation of buy/hold/sell on funds. This looks at both quantitative and qualitative factors. We have updated our Review tool. We will be covering key changes in our review this week”).

    1. Bhavana Acharya

      Hello sir,

      Prime Ratings is the rating for funds, using a range of metrics and weights designed for each category. Prime Ratings forms the base for Prime Funds, which is our recommended list of funds. Not all 5-star funds or funds that move up in ratings automatically come in Prime Funds. We see qualitative metrics, market scenario and styles so that each fund in Prime Funds is unique and you will be able to combine them easily to build a well-rounded portfolio.

      Separately, we also give buy/sell/hold calls on other funds. This is in our MF review tool (www.primeinvestor.in/mf-review-tool). You can get our view on funds you hold or are interested in. We have updated Prime Ratings and the MF Review Tool already. This article talks about noteworthy changes in ratings. In the MF Review article we will list notable changes in our view on some funds.

      Thanks,
      Bhavana

      1. Nanda Kumar Rajaram

        Thanks Bhavana for the clarifications – its helpful.

        Also thanks for posting the new article today – its timely: “How to use Prime Mutual Fund Review Tool (our buy/hold/sell on MFs)”

    1. Bhavana Acharya

      Hello sir,

      The multi-asset allocation category has many funds with very different histories – their common history as multi-asset allocation is just about 2 years now, so it’s hard to do a proper assessment of them. We may take it up in the next review or later.

      Thanks,
      Bhavana

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

The essence of PrimeInvestor

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

Legal Disclaimer : Redwood Research (with brand name PrimeInvestor) is an independent research entity offering research services on personal finance products to customers. We are a SEBI registered Research Analyst (Registration: INH200007478). The content and reports generated by the entity does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information is provided on an ‘As Is’ basis by PrimeInvestor. Information herein is believed to be reliable but PrimeInvestor does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. The services rendered by PrimeInvestor are on a best effort basis. PrimeInvestor does not assure or guarantee the user any minimum or fixed returns. PrimeInvestor or any of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates will not liable for any losses, cost of damage incurred consequent upon relying on investment information, research opinions or advice or any other material/information whatsoever on the web site, reports, mails or notifications issued by PrimeInvestor or any other agency appointed/authorised by PrimeInvestor. Use of the above-said information is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this website, blog, and investment solutions are and shall remain with PrimeInvestor. All material made available is meant for the user’s personal use and such user shall not resell, copy, or redistribute the newsletter or any part of it, or use it for any commercial purpose. PrimeInvestor, or any of its officers, directors, employees, or subsidiaries have not received any compensation/ benefits whether monetary or in kind, from the AMC, company, government, bank or any other product manufacturer or third party, whose products are the subject of its research or investment information. The performance data quoted represents past performance and does not guarantee future results. Investing in financial products involves risk. Mutual Fund Investments are subject to market risk, read all scheme related documents carefully. As a condition to accessing PrimeInvestor’s content and website, you agree to our Terms and Conditions of Use, available here. This service is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Redwood Research or its affiliates to any registration or licensing requirement.

• Aditya Birla Mutual Fund • Axis Mutual Fund • Baroda Mutual Fund • BNP Paribas Mutual Fund • BOI AXA Mutual Funds • Canara Robeco Mutual Fund • DSP Mutual Fund • Edelweiss Mutual Fund • Essel Mutual Fund • Franklin Templeton Mutual Fund • HDFC Mutual Fund • HSBC Mutual Fund • ICICI Mutual Fund • IDBI Mutual Fund • IDFC Mutual Fund • IIFL Mutual Fund • Indiabulls Mutual Fund • Invesco Mutual Fund • ITI Mutual Fund • Kotak Mahindra Mutual Fund • L&T Mutual Fund • LIC Mutual Fund • Mahindra Mutual Fund • Mirae Asset Mutual Fund • Motilal Oswal Mutual Fund • Nippon India Mutual Fund • PGIM Mutual Fund • PPFAS Mutual Fund • Principal Mutual Fund • Quant Mutual Fund • Quantum Mutual Fund • Sahara Mutual Fund • SBI Mutual Fund • Shriram Mutual Fund • Sundaram Mutual Fund • Tata Mutual Funds • Taurus Mutual Funds • Union Mutual Funds • UTI Mutual Funds • Yes Mutual Funds

Equity: Large Cap Funds | Mip Cap Funds | Large And Mid Cap Funds | Small Cap Mutual Funds | Contra Mutual Funds | Dividend Yield | Focused Mutual Funds | Find Top Index Funds | Best Sector Funds | Thematic Mutual Fund | Best Value Mutual Funds | Equity Linked Savings Scheme | Tax Saving Funds
Debt: Banking And PSU Funds | Corporate Bond Funds | Credit Risk Funds Mutual Funds | Dynamic Bond Funds | Floating Rate Funds | Gilt Mutual Funds India | Find Top Liquid Funds In India | Long term debt funds | Low Duration Funds Debt Funds | Medium Duration Debt Funds | Medium To Long Duration Funds | Money Market Debt Funds | Overnight Debt Funds | Short Duration Debt Funds | Ultra Short Term Debt Fund
Hybrid: Aggressive Hybrid Funds | Arbitrage Mutual Funds | Balanced Advantage Mutual Funds | Conservative Hybrid Funds | Dynamic Asset Allocation | Equity Saving Funds | Multi Asset Funds | Multi Asset Allocation

Login to your account