India Ratings & Research's (Ind-Ra) Asset Management Group
rates domestic bond funds in the context of credit quality and volatility.
Bond Fund Credit Ratings
Ind-Ra fund credit ratings are an assessment of the overall credit quality of a debt mutual fund’s portfolio. The ratings are based on an evaluation of several factors including the credit quality and diversification of assets in the portfolio, management strength, and operational capabilities.
The credit quality of a bond fund will be similar to the weighted average default probability of the portfolio of bonds in the fund. Therefore, the credit quality of the fund is similar to that of a similarly rated fixed-income instrument.
Bond fund credit ratings do not address any risk other than credit risk. In particular, these ratings do not address the risk of loss due to changes in market interest rates and other market conditions. Bond fund credit ratings do not comment on the adequacy of market price. Moreover, bond fund credit ratings do not address the extent to which fund expenses and costs might reduce distributions to shareholders. Managed fund credit ratings are complemented by managed fund volatility ratings as described below.
Ind-Ra managed fund volatility ratings are an opinion as to the relative sensitivity of the total return (including price) on a fund’s shares to a broad array of assumed changes in interest rates, mortgage prepayment speeds, portfolio liquidity, spreads and other market conditions.
A fund with a lower risk volatility rating is likely to exhibit less total return sensitivity than a security with a higher risk volatility rating across a broad and varied range of market conditions.
Volatility ratings are expressed on a scale of ‘V1+’ (least volatile) through ‘V10’ (most volatile). The ‘V1+’ rating is assigned only to money market funds that should not experience loss of principal value to shareholders or participants even in severely adverse interest rate environments. However, volatility ratings do not predict the direction or magnitude of changes in such market conditions and, therefore, do not predict whether, or the extent to which, any particular bond fund will perform favourably or adversely in the future.