The Irrelevance Of MF Star Ratings

Star ratings are profoundly used while making decisions regarding mutual funds investments. These ratings are based on past performance of the funds and certainly do not reveal anything about the future. DSIJ clears the air around investing in mutual funds, based solely on star ratings.

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A new trend has emerged among online shoppers. They go for a product with a higher star rating. However, in the mutual fund space, this trend is being followed for a while now. Many investors and their advisors trust the ratings given by various companies to mutual fund schemes. It helps them decide where to put their hard-earned money to gain maximum benefits. The size of mutual fund investment is increasing day-by-day and various reports suggest it quadrupling in the next five years. These ratings are considered as guidance to future performance. Higher the rating better will be the performance in the future.

Nevertheless, our research shows that it is not cased in most of the scenarios.

What are the rating systems?

Star ratings are something, in which mutual fund schemes are rated and given stars based on various parameters. There are several rating agencies, such as Morning Star and Value Research, to rate these schemes, speak specific method and set parameters. Usually, more stars indicate better performance of the scheme. Simply put, a fund with a 5-star rating is assumed to be better performing than a 4-star rated fund. Similarly, a 4-star fund is expected to have a much better future than a 3- or a 2-star rated fund. A 1-star rated fund is assumed to be worst performing among all. In India and all over the world, star ratings greatly influence investors. There is an analogy that persists among the investors that investing in a 5-star fund is the way to go about investing in mutual funds. However, the reality is much different than this.

The study