The Significance of CRISIL Ratings for Informed Investment Decisions

Making informed investment choices requires access to reliable information. This is where credit ratings from agencies like CRISIL can help guide your decisions, especially when selecting fixed income securities. Let's explore what CRISIL ratings are and how they can empower you to invest wisely.

• Table of contents

• CRISIL full form
• Understanding CRISIL ratings
• How CRISIL ratings help guide investment decisions
• CRISIL rating in making investment decisions
• Significance of CRISIL ratings for mutual funds
• Key parameters in CRISIL mutual fund ratings
• How to use CRISIL mutual fund ratings
• How does CRISIL rank mutual fund schemes?
• CRISIL ranks for types of mutual funds

CRISIL full form

CRISIL stands for Credit Rating Information Services of India Limited. It is India's first credit rating agency, incorporated in 1987. CRISIL pioneered the concept of credit ratings in India. It is now a subsidiary of S&P Global Ratings.

Also Read: Average Credit Quality

Understanding CRISIL ratings

CRISIL provides ratings, research, analytics and solutions worldwide. In India, CRISIL ratings provide an assessment of the credit risk associated with debt instruments and a company’s abilities to service financial obligations. The ratings reflect CRISIL's opinion on the level of creditworthiness, based on analysis of quantitative and qualitative evaluation criteria. Higher ratings indicate lower expected risk, while lower ratings suggest higher risk.

How CRISIL ratings help guide investment decisions

CRISIL ratings are essentially credit scores for companies or financial instruments. In simple terms, these ratings help investors measure the risk of a company failing to fulfil its financial obligations. The higher the rating, the lower the risk of default.

CRISIL ratings offer standardised measurements of credit risk. This allows individual and institutional investors to quickly assess the relative financial strength of issuers of various debt instruments like corporate bonds or debentures.

Investors can use CRISIL ratings to compare opportunities within a sector or across different types of issuers. The ratings provide efficient signals of creditworthiness, rather than you having to do detailed financial analyses on each issuer individually. This helps expedite your investment evaluation and decision-making.

The ratings also show how creditworthiness changes over time. Regular surveillance by CRISIL analysts tracks performance to monitor for upgrades or downgrades. This identifies higher risk situations for you to avoid or reassess holdings.

CRISIL rating in making investment decisions

CRISIL ratings help investors evaluate relative risks across investment options like corporate bonds and debt funds. The ratings provide a standardised framework to compare credit quality. Investors can use the ratings to choose instruments and issuers with higher certainty of timely interest and principal repayments.

Significance of CRISIL ratings for mutual funds

CRISIL also evaluates and assigns ratings to mutual funds and schemes, analysing factors like portfolio holdings, fund management experience and track record.

Schemes are ranked between 1 and 5, with 1 being the highest ranking indicating ‘very good performance’, as per CRISIL.

Key parameters in CRISIL mutual fund ratings

CRISIL considers multiple quantitative and qualitative factors when rating mutual funds, including.

• Mean returns
• Volatility
• Portfolio concentration
• Exposure to sensitive sectors
• Liquidity
• Credit quality of assets
• Modified duration of debt funds (measures interest rate risk)

How to use CRISIL mutual fund ratings

You can utilise the CRISIL mutual fund ratings as an efficient tool to:

• Shortlist higher ranking funds within a category based on ratings.
• Identify funds rated CRISIL Fund Rank 1 with the lowest credit risk profiles in debt fund categories.
• Understand a scheme's strengths and weaknesses compared to peers.
• Monitor ratings changes to watch for emerging risks or improvements.
• Supplement your own research and make informed investment selections.

CRISIL ratings offer an added indicator that you can consider when building your mutual fund portfolio.

How does CRISIL rank mutual fund schemes?

CRISIL ranks schemes on a 5-point scale – 1 to 5. The top 10 percentile of funds are ranked 1 and the next 20 percentile are given CRISI Fund Rank 2

Rank 1 indicates the highest level of investment risk management capability and lowest credit risk.

CRISIL ranks for types of mutual funds

CRISIL evaluates funds across all the major mutual fund categories, using consistent parameters tailored to each category's investment strategy:

• Equity funds: CRISIL analyses historical returns compared to benchmarks and peers, performance consistency, risk-adjusted return metrics, fund manager equity research experience and investment processes.
• Debt / fixed income funds: CRISIL focuses more on portfolio credit quality, sensitivity to interest rates, liquidity risk management and capabilities of the fixed income fund management team.
• Hybrid funds: Analysis weighs both equity and fixed income expertise of the fund management team, historical returns, and risk-adjusted return measures. Asset allocation between equity and debt is also considered.
• Index funds: CRISIL examines the ability to closely replicate index returns over time, trading costs and annual expense ratios.
• ETFs: Ratings emphasise how closely the ETF mimics its benchmark index, tracking error, liquidity, costs and counterparty risks associated with ETF structure.
• Fund of funds: Ratings focus on due diligence capabilities in selecting underlying funds, portfolio construction process and risk management.

Also Read: How To Invest in ETFs

Conclusion

Use CRISIL ratings as an additional input to build a balanced, diversified portfolio aligned with your needs. Their independent credit risk assessments make the investing landscape easier to navigate. While CRISIL ratings offer a useful perspective, they should not be the sole basis for your investment choices. You need to evaluate each opportunity in relation to your specific investment objectives, time horizon and risk tolerance.

FAQs:

Is a credit rating useful to invest in debt mutual funds?

Yes, credit ratings are very useful when investing in debt mutual funds. They provide an independent, standardised assessment of the underlying credit quality of the portfolio. Higher rated funds have greater exposure to issuers with higher creditworthiness and lower chances of default. This helps manage the overall riskiness of the mutual fund investment.

Does the CRISIL rating guarantee repayment?

No, CRISIL ratings do not guarantee the repayment or creditworthiness of a particular issuer or debt instrument. The ratings reflect their professional opinion based on current information and their rating methodologies. The ratings are not a warranty of a particular outcome.

Who regulates rating agencies?

In India, credit rating agencies are regulated by the Securities and Exchange Board of India (SEBI). SEBI formulates rules and guidelines that rating agencies must adhere to, concerning areas like transparency and disclosure norms.

What are some reasons for changes in credit ratings?

CRISIL ratings can change for multiple reasons, both company-specific and based on overall market conditions. If a company's financial performance and profits strengthen over time, CRISIL is likely to upgrade its rating, as the issuer's creditworthiness has improved.

What is the benefit of a credit rating for investors?

Credit ratings give investors an easily understandable grading system to compare credit risks across different debt instruments and issuers. The standardised ratings scale condenses vast amounts of complex financial data into simple letter ratings categories.