InvestorQ : Should I stop a SIP if a rating agency’s ranking of the fund I invested in goes down?
Karim Sahu made post

Should I stop a SIP if a rating agency’s ranking of the fund I invested in goes down?

Swapnil Sarang answered.
4 years ago


Most rating agencies adopt a formula-driven approach. They give a weightage to various characteristics of the fund before arriving at a final score, based on which the schemes are ranked.

But the problem is the timeframe considered. Most rating agencies only consider three years’ performance.

A few agencies give nearly 20% to the 9-month performance of the scheme. What’s worse, is that by giving a ‘progressive weightage’ of 32.5%, 27.5%, 22.5% and 17.5%, respectively to the 36, 27, 18 and nine months’ performance, the rating agencies are giving way more importance to near-term performance than what should be given.

Thus, the performance is not standalone unique periods but overlapping periods.

While fund houses themselves say that investors should have a long-term investment horizon when they’re investing in the equity market, but they themselves forget this point.

The market witnesses numerous cycles- bull cycle and bear cycle- the former is when the market is performing well and scaling new heights, whereas the latter is when the market is underperforming and hitting new lows.

A three-year timeframe does not even cover a single bear or bull market cycle. In such a situation how can you judge whether a mutual fund scheme is performing consistently or not?

Thus, do not give immense importance to the rantings of these agencies. Instead base your opinion on how a fund has performed over multiple market cycles spanning over a decade or so.

There have been instances of funds doing extremely well in bull markets but ending up giving up all their gains in a bear market and vice-versa. You should own the evergreen funds that will continue generating returns for you in bull and bear cycles.

Hence, analyse funds on quantitative and qualitative parameters. While the quantitative factors delve in to the fund’s past performance, the qualitative aspects rate the fund manager’s experience, investment strategy, etc.

Even if your fund is not performing well today, you must stop your investment in it only in the following situations:

- If you have achieved your financial goal

- You feel the need to restructure your portfolio

- The scheme’s fundamental attributes or investment objective changes, or

- If you find a better alternative

Thus, don’t get too worried by the rating downgrade of your mutual fund. See if anything fundamentally has changed that has merited this rating downgrade. If not, just stay invested while reviewing your investment every few months.