ICRA’s Credit Risk rating is an analytical process characterised by both width and depth, and following on the organisation’s extensive knowledge base encompassing almost every sector of the Indian economy, besides the economy itself. Our goal in Credit Risk Rating of debt mutual funds is to provide investors with a simple-to-use measure of credit risk. The Credit Risk Ratings incorporate ICRA’s assessment of a debt fund’s published investment objectives and policies, its management characteristics, and the creditworthiness of its investment portfolio.
ICRA’s analysts obtain and rely on relevant data from public and non-public sources. While this data may vary according to the type and nature of the debt fund, the following information is typically used in the Rating process:
Prospectus and related documents:
- Debt fund portfolio data, including periodic investor reports and public filings
- Industry surveys, studies, and special reports
- Internal documents describing the Asset Management Company’s (AMC’s) structure,
investment philosophy, decision making process, and performance track record
In addition, ICRA encourages continual dialogue with the AMC’s management. ICRA’s analysts would normally meet the company representatives for a discussion of the relevant factors in connection with the assignment of an initial Credit Risk Rating, and on a periodic basis thereafter.
ICRA’s Credit Matrix provides debt fund managers with investment decision flexibility. The Credit Matrix is a tool used by ICRA to analyse the investment portfolios of debt mutual funds. The analysis involves measuring a portfolio’s aggregate credit quality through a review of the credit quality of each underlying debt security. A portfolio’s weighted average credit quality is then measured against the appropriate benchmark credit score. Separate benchmark credit scores are used for liquid and bond funds. Short-term debt funds have weighted average portfolio maturities of up to one year and are typically liquid/cash funds. Long-term debt funds, on the other hand, have weighted average maturity of more than one year and are typically bond funds. ICRA benchmarks short-term debt funds including liquid/cash funds against a 12-month benchmark credit score, while long-term debt funds are benchmarked against the long-term benchmark credit score. ICRA generally assigns short-term MF Credit Risk Ratings to short-term/liquid funds, but gives an option to these funds to seek long-term MF Credit Risk Rating. Similarly, ICRA generally assigns long-term MF Credit Risk Ratings to bond funds, but gives an option to these funds with weighted average maturity of less than 12 months to seek short-term MF Credit Risk Ratings.
The Benefits
For Investors, the Ratings:
- Facilitate informed investment decision making
- Provide independent and reliable opinion on:
- the relative credit quality of the portfolio
- the quality of the Fund’s management and operations
- Help meet specific investment objectives
For Intermediaries, the Ratings help to:
- Provide informed advice to investors
- Offer products matching the specific return-risk preferences of investors
- Enhance the marketability of various schemes
- Differentiate (using the ICRA Rating) the various Schemes from other
Rated/non-Rated Schemes
For Fund Sponsors/AMCs, the Ratings:
- Provide an assessment made by an independent agency
- Serve as a marketing tool to differentiate a scheme from other available
schemes
- Help meet investors’ Rating requirements
- Provide for benchmarking of performance