At Morningstar, we have always followed the principle of true to label. That is why we spend a lot of time understanding the underlying mandates and portfolio holdings of funds so that we can appropriately categorize funds within relevant peer groups. This helps investors make a suitable comparison between funds with similar mandates. Fund categories are especially relevant from the context of our Morningstar ratings as well as Analyst ratings which are on a peer relative basis.
The Securities and Exchange Board of India, or SEBI, introduced a circular on October 6, 2017 for categorization and rationalization of mutual fund schemes. The market regulator defined various categories of funds, along with the scheme characteristics for each fund category.
Thanks to the above, asset managers are currently in the process of realigning their funds to match the specified mandates in the defined categories. Thus going forward fund categories will have a fairly uniform set of funds with similar mandates.
Given this development; we intend to align our current Morningstar categories with SEBI mandated categories.
We are currently in the process of receiving revised category and mandate changes from Asset Management Companies, or AMCs. We will evaluate the mandate changes for funds and accordingly effect the category and name changes as per the SEBI categories in our database.
Here are some frequently asked questions with regards to this issue.
1) When will the category changes be effective?
The original date envisaged was end of March as per the timelines mentioned in the above mentioned SEBI circular. But given that many AMCs are still in the process of making official announcements around their revised fund categories and mandates, this exercise is likely to be completed by June 30, 2018.
2)
How dramatic will be the changes?
We don’t think the changes will be overarching. Since we have previously categorized funds after evaluating their historical underlying portfolios, we believe the impact on funds within our existing categories will be limited for funds that continue to be run with a similar mandate as before. Category changes will be necessary where a fund has a specific mandate change.
3) How will category changes affect our Star Ratings?
The Star Ratings will continue to be produced on a monthly frequency. Funds will be rated as long as they have a 3-year track record and fall within a rated category.
There are three probable scenarios in this case:
- No change in category: Funds that don’t change categories, the rating criteria remains unchanged.
- Minor change in category: For funds that have minor changes in categories, we apply an average degree of similarity between the current category and the fund’s historical categories. This factor assigns relatively higher weightage to nearer term Morningstar Risk Adjusted Returns (MRAR) as opposed to our usual weightages that apply. For example, a large-cap fund now categorized as a multi-cap fund.
- Major change in category: In case there is a dramatic change in mandate, in which case the historical returns of the fund become irrelevant. In such cases we have the option to suspend the rating on the fund if deemed appropriate and only consider it once it completes 3 years under the new mandate. For example, a sector fund now categorized as a large-cap fund.
You can read the detailed Morningstar rating methodology here
4) How will category changes affect our Analyst Ratings?
We are closely monitoring the change in fund mandates. Wherever we witness a dramatic change in the fund mandate, which necessitates us to put the fund under review and seek a meeting with the manager at the earliest to review the newer strategy. In cases where the mandate change is at the margin, we will most likely continue to hold our current Analyst Rating and meet the manager as per our regular review cycle.
You can read the detailed Morningstar Analyst rating methodology here
5) What happens to historical fund data?
Historical fund data remains unchanged in our databases. You can still access data on historical categories, historical Morningstar Ratings and any other historical data points as before. The changes will be made on a prospective basis.
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