Credit rating agencies assign ratings to mutual fund schemes which invest entirely, or mostly, in debt. The ratings are based on the overall exposure to default risk, with regard to timely receipt of payments from the investments the scheme has made.
Why is the rating of a scheme important?
Ratings help an investor assess the credit quality of a particular scheme before making an investment. Just like IPO grading, mutual fund grading looks at the past performance of the scheme.
However, it does not talk about the possible future performance of a fund. Investors can examine the fund risk vis-a-vis their risk appetite.
Why the need for a standard rating symbol?
Last week, the Securities and Exchange Board of India asked CRAs to use standardized rating symbols. A common symbol is expected to help investors understand the ratings easily, apart from making the whole process fair.
According to the new symbols, long-term debt schemes with the highest degree of safety will be rated as AAAmfs. AAmf and Amf mean they have high and adequate levels of safety, respectively.
BBBmfs and BBmfs-rated schemes carry moderate risk. A Bmf-rated scheme has high degree of risk. A scheme with Cmf rating has a very high level of risk. Rating companies can use the '+' or '-' symbol, along with the rating, to reflect the comparative standing within the category.
For a short-term debt fund scheme, a rating of A1mfs will be the highest. A2mfs and A3mfs-rated schemes reflect a strong and moderate degree of safety, respectively. A4mfs-rated schemes have the least degree of safety.
Source: http://www.rediff.com/business
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