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BCII'S MUTUASL FUND RATINGS

Fund Rating is a convenient composite measure of both returns and risk. The fund rating is purely quantitative and there is no subjective component to the fund rating. The assessment does not reflect Bajaj CapitalInvestors India’s(BCII) opinion of the future potential of any fund. It only gives a quick summary of how a fund has performed historically relative to its peers.

How Funds are Rated
The fund ratings are based on a time period of 1 year. Weekly performances for the whole year combined on a risk-adjusted basis to give a single assessment of each fund’s risk rating, relative to the other funds in the category. BCII does not rate a fund (be it Equity or Debt) with less than 1 year of performance.

Fund Risk Grade
The Fund Risk Grade captures the fund’s risk of loss. Fund Risk Grade is different from the conventional risk and volatility measures like standard deviation and beta. Fund Risk Grade indicates only downside volatility. Downside volatility refers to absolute losses and even periods when the fund under-performs a risk-free guaranteed investment. The rationale behind this methodology is that you can always get a guaranteed return by investing your money in a bank term-deposit. And the risk in investing in a mutual fund not only includes the possibility of losing money, but also the chance of earning less than you would have with a guaranteed investment. Even if the fund breaks-even, the investor still misses the opportunity of earning a guaranteed return.
To calculate Fund Risk, weekly fund returns are compared against the weekly risk-free returns. Examples of the risk-free return are like 180 Day T-Bill Rate, SBI 1-Year Term-Deposit Rate etc. For all week the fund has under-performed the risk-free return, the magnitude of under-performance is added. This helps us to arrive at the average under-performance and how the fund has performed vis-à-vis its category average. The relative performance of the fund is expressed as a risk score. The risk score of a fund is plotted along a bell curve to determine the fund's Risk Grade.

Fund Return Grade
The Fund Return Grade captures a fund’s risk-adjusted return relative to other funds in its category. The returns though adjusted for dividend, bonus or rights, are not adjusted for loads. The fund’s weekly return is compared with the weekly risk-free return to arrive at the fund’s total return in excess of the risk-free return. A score in excess of one indicates that the fund has performed better than its category average and vice versa.
The tools used to arrive the risk-adjusted return score are detailed below:
Std. Deviation: Reflects the return fluctuations against its own mean-value to give a fair idea about the fund’s volatility.
Beta Measure: Reflects the systematic risk (related to the benchmark) assigned to each of the funds.
Sharpe Ratio: Reflects the excess return over the risk-free return per unit of its volatility.
Treynor Ratio: Reflects excess return over the risk-free return per unit of the systematic risk the fund is exposed to.
Jensen's Alpha (Differential Return): Reflects the return that is expected for the fund given the risk exposure of it and compare that with the return actually realised over the period under study.

Fund Rating
Risk-Adjusted Rating is determined by combining the fund’s Risk score with its Return score. The resulting number is plotted on a normal statistical distribution to determine the fund’s rating.

Top 10%	-	*****	-	Very Good
Next 22.5%	-	****	-	Good
Middle 35%	-	***	-	Average
Next 22.5%	-	**	-	Below Average
Bottom 10%	-	*	-	Poor

Observation
After nearly eight months, leading Equity funds were able improve their risk-adjusted performance, besides beating their benchmarks. And this has been registered in their rating upgrades. Pioneer ITI Bluechip, Pioneer ITI Prima and Zurich India Equity got back their 5 star status, which they had lost two months back. This month, Reliance Growth also joined the esteemed 5-star league after almost a year and a half. Alliance Equity and Birla Advantage have shown improved performance and has been assigned 4-star rating. As for the medium and long-term Debt funds, the maximum number still falls in the 4-star category, with a few 5-starrers. Some of the funds, which are relatively new like Grindlays, HDFC, IL&FS and Kotak Mahindra have not been rated. But as per data available to us, all these funds have shown impressive performance at per with some of the top-rated funds and they are indeed investment-worthy.