The performance of Bond Funds critically depends on among other factors the Credit Quality of the assets held in the portfolio and the Volatility of its portfolio value with respect to appropriate benchmarks. To address investors’ requirement of having a scientific tool to assess the credit quality of a Bond Fund, CRISIL pioneered Credit Quality Ratings of Bond and Liquid Funds in the domestic markets in 1996.

» Concept
» Benefits of Credit Quality Ratings
» Methodology
» Surveillance

Concept
CRISIL assigns credit quality ratings to fixed income mutual funds. These ratings reflect the level of protection that a fund’s portfolio holdings provide against losses from credit defaults.

Typically, debt investors have a lower risk appetite than equity investors and look for both protection of their principal and for fixed returns. Consequently, the credit quality of a debt fund’s investments is a critical input for determining the quality of its portfolio’s returns. In this regard, CRISIL’s bond fund Credit Quality Ratings serve as a tool to investors for selecting funds with a suitable risk-return criterion and would also provide an independent opinion on the overall credit risk associated with the securities in a fund’s portfolio.

Benefits of Credit Quality Ratings
Compared to global mutual fund investors, the risk profile of the Indian investors appears to markedly conservative. This is exemplified in the fact the proportion of assets under management under bond funds in India far exceeds that under equity funds. Hence, CRISIL believes that indicators of credit quality of bond funds would be of great relevance in the Indian context given the relatively risk averse nature of the Indian mutual fund investors. CRISIL’s Credit Quality Ratings would give investors assistance to select schemes matching their respective investment requirements. Fund houses and the distributors will also be able to convey the objectives of the respective fund constitutions clearly through Credit Quality Ratings: viz., whether a particular scheme will invest only in highly rated securities or if it would look largely at high yielding securities whose position in the risk spectrum may be below highly rated securities.

Being an independent, third party certification, CRISIL’s Credit Quality Ratings are well acceptable to the investors. The rating process also helps fund houses to benchmark and manage the credit quality of their portfolios based on inputs given by CRISIL. Further it serves as an effective marketing tool for Fund Houses.

Surveillance
Once a bond fund Credit Quality Rating is published, the fund is placed under continuous surveillance by CRISIL. This means that CRISIL will review the fund’s holdings, its regulatory aspects and corporate actions on a monthly basis and may reevaluate the rating based on new information, whenever such action is warranted. The assigned Credit Quality Ratings would also be contingent on a set of warranties required to be furnished by the fund house as regards inter alia regular portfolio information to be furnished to CRISIL and disclosure requirements to be complied with while publicly disseminating the Credit Quality Ratings.