Obtaining reliable information is the essence of a sound investment strategy and one of the most reliable suppliers of financial information in India is CRISIL or the Credit Rating and Information Services of India Limited.
CRISIL, in which the renowned Standard & Poor owns a majority stake, is a leading firm for providing credit ratings and financial analysis in India.
CRISIL offers a range of services for many types of clients; in this article we will look at two areas which are particularly relevant to retail investors: mutual fund ratings and IPO grading.
Rating mutual funds
There is a plethora of mutual funds out there and it can be difficult for the retail investor to figure out where s/he can invest. CRISIL publishes a Composite Performance Ranking (CRISIL CPR) which can help investors choose a mutual fund.
The ranking is calculated every quarter (each quarter consists of three months; a year has four quarters) and generally based on two years of data. It covers a wide range of mutual funds ranging from large cap funds to income funds.
The ranking is based on a weighted average of scores for a number of categories. Some of the categories include:
~ Superior return score: this looks at the returns that the fund has generated over a period of time compared to its competitors
~ Concentration: whether the mutual fund is too heavily concentrated in particular industries or firms
~ Liquidity: how liquid the assets owned by the fund are
Each fund is given an overall rating from 1 (best) to 5 (worst) and is also given a rating for each of the individual categories. The weights given to the categories change according to the type of fund. For equity-based funds, the superior return score is the most important and may be given a weight of 75-80 per cent.
Income funds which are purchased by more risk-averse investors (investors who are not very keen on taking huge risks) will give a lower weight to return and will look at other variables like the quality of the debt that has been purchased.
There are several others types of schemes each with their own weights. The bottom line is that the ratings are useful regardless of what type of investor you are and the type of fund you wish to purchase.
IPO grading
Many companies which issue an initial public offering, IPO, are unknown quantities without much of a track record. This can make it tricky for the average investor to figure out where to put his or her money. CRISIL's IPO Grading is a good place to start your research into a particular IPO.
The grading is CRISIL's assessment of the business fundamentals of new public issues. CRISIL will issue a rating from 1 to 5 (somewhat confusingly this time 1 is the worst and 5 is the best) and also provides an analysis of the company.
For example an analysis might examine the long-term prospects of the company's sector and the financial prospects of the company itself. It might take a look at the quality of the management and corporate governance as well as its current operations.
In short it will provide the basic facts about the company as well as CRISIL's assessment about its prospects.
Conclusion
Despite CRISIL's strong reputation, you should never rely solely on its rankings while making your investment decisions. Even the best ratings agency will make mistakes and these are often evident in financial crises like the sub-prime crisis that is sweeping the US today.
Furthermore you should always remember that no matter how good the mutual fund or company you are investing in is, short-term losses are always possible particularly when markets are volatile. Despite this the ratings provided by CRISIL are a good place to start researching your different investment options.
