Mutual funds have gained considerable prominence in India. A large variety of mutual fund schemes with different investment styles and objectives are now available in the Indian Market. Fund managers today have a variety of options to construct their portfolios from plain vanilla bonds to more complex derivatives. 

Credit Quality Ratings

CARE’s fund credit quality ratings are opinions on the overall credit quality of specific Debt Mutual Fund schemes. The ratings capture funds overall exposure to default risk. CARE’s fund credit quality ratings are based on evaluation of funds investment strategy and portfolio credit risk. It also involves evaluation of credit quality of individual assets, diversification of portfolio, management quality and operational policies. CARE uses the concept of credit scores, assigned to individual securities, as per credit scoring matrix developed by CARE. CARE reviews the rated mutual fund scheme on an ongoing basis to support its published rating opinions. As such, monthly reports of the fund are examined.

CARE’s fund credit quality ratings, seek to enhance the understanding of fund credit risks to investors. Fund ratings would provide an independent opinion on funds credit quality to enable investors to evaluate such fund schemes. Investors can then examine the fund risk vis-à-vis their risk appetite. Fund managers would use such ratings for communicating their target level of credit risk of their schemes to investors to enable them to make informed decisions.

Capital Protection Oriented Schemes

CARE’s capital protection oriented scheme ratings are opinions on the degree of certainty with which the portfolio structure ensures timely payment of at least the face value of the units to unit holders on maturity of the scheme. CARE’s capital protection oriented scheme (CPS) ratings assess the degree of certainty with which the portfolio structure is sufficient to achieve the objective of capital protection on maturity of the scheme. Capital protection here means that the NAV should be at equal to or greater than the face value of the scheme on maturity.

CARE’s methodology for assessing the strength of the portfolio structure, in terms of how well it provides capital protection, involves a comprehensive analysis of the investment strategy adopted by the asset management company (AMC), the prevailing market conditions (with respect to the various instruments that the scheme invests in) and the AMC’s track record & past performance. CARE’s CPS ratings are based upon fulfillment of certain minimum conditions by the AMC under which the scheme will operate. The AMC needs to ensure that these minimum conditions are met at all times during the life of the scheme, as a violation of any of these conditions may adversely affect the structure of the scheme and the rating. Suitable warranties from the AMC are taken while awarding the rating. SEBI has stipulated a quarterly review of the rating of a CPS, although the review may be undertaken at more frequent intervals.