Mutual Fund Critic
Fund homes are required by SEBI to classify the risk of each structure as you have five levels: low, low moderately, moderate, moderately high, or high. But what exactly should we label of a structure whose risk level is defined by the fund house as, say, ‘moderately low’? On the other hand, what should we label of Value Research or Morningstar telling us that the risk grade or risk rating of that scheme (in accordance with its peers) is, say, ‘average’?
It isn’t just their ambiguity: I’d not rely on any of these labels as they largely stem from a slim view of risk. I believe that if we are not careful, these may lead us to make flawed assumptions about the riskiness of a structure and, worse, act upon them. To demonstrate the perils of relying upon these risk rankings, I’d like to take the case of a specific system whose risk ratings are currently poles apart from my assessment of its risk.
To be clear, this structure can be an extreme outlier: it might be hard to find a scheme quite like this. However, the extremity of this example is why is it beneficial to show the arbitrary character of fund-house risk rankings, and the restrictions of the technique followed by entities such as Value Morningstar and Research. The scheme involved is a debt fund that has been around for over a decade. From what I could see, for the majority of its existence, there’s been a noticeable …
