Rating of Mutual Fund

MUTUAL FUND RATING METHODOLOGY – INFOMERICS

INFOMERICS’ fund credit quality ratings are based on evaluation of the fund’s investment strategy and portfolio credit risk. It also involves evaluation of credit quality of individual assets, diversification of portfolio, management quality and operational policies. INFOMERICS uses the concept of credit scores, assigned to individual securities, as per credit scoring matrix developed by INFOMERICS.

INFOMERICS’ CREDIT SCORING MATRIX

In INFOMERICS’ credit scoring matrix, a credit score is assigned to each rating category. The score is essentially a function of the credit quality/rating of the security and its residual maturity. INFOMERICS’ credit scores are arrived at using historical data on defaults adjusted for data limitations. Credit score is higher for higher rating categories and vice versa. The credit score of a rating category is weighted by the proportion of exposure to that rating category. The aggregate of such scores (i.e. the fund credit score) reflects the credit quality rating of the fund. In order to retain the rating, the fund credit score has to be maintained within the benchmark fund score of the rating category.

QUALITATIVE FACTORS

Qualitative factors also play an important role in arriving at the final rating. The qualitative factors examined by INFOMERICS are: Management quality

Infomerics assesses the Asset Management Company (AMC) in terms of organisation set up, qualifications and experience of senior management team. The AMCs track record in fund management is also examined. Infomerics also examines the credentials of the AMC sponsors and Board of Trustees.

OPERATIONS AND RISK MANAGEMENT SYSTEMS

Infomerics examines MIS and risk management systems in various operational areas. Systems for regular monitoring of the portfolio as well as transactions with custodians and registrars are examined. The accounting systems, disclosure levels and the regulatory compliance record of the AMC as well as systems to ensure such compliance are also studied. The quality of trading and back office systems, control systems for segregation of trading and back office operations is also examined.

ONGOING REVIEW, SURVEILLANCE AND WITHDRAWAL OF THE RATING

Infomerics 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 as well as detailed annual review of the fund is also undertaken. While the fund has to maintain the fund credit score within the benchmark fund credit scores, in a particular month, if the fund credit score breaches the benchmark, Infomerics provides one month to the AMC to realign the score. If the fund credit score is not corrected in that period, Infomerics would consider revising the rating opinion. Infomerics would withdraw the rating of a mutual fund on request by the AMC with a notice period of one year.

INFOMERICS MUTUAL FUND RATING SCALE

Modifiers (+ or -) can be used with rating symbols for the categories IVR AAmfs to IVRCmfs. The modifiers reflect the comparative standing within the category.