Fitch Ratings has changed its Indian mutual fund rating scales in line with the guidelines issued by the Securities and Exchange Board of India (SEBI) dated 15 June 2011.
Prior to this change, Fitch had two different rating scales in keeping with its global practices. First, a money market fund (MMF) rating scale (with an 'mmf' suffix) - applicable to funds whose objectives are capital preservation and investor liquidity. Secondly, a bond fund rating scale, where credit and volatility ratings are assigned together to reflect credit and market risks.
Fitch's fund rating methodologies (for money market and bond funds) are consistent with SEBI-recommended scales and definitions. As such, SEBI guidelines clearly suggest two distinct rating scales for long-term and short- term funds and the proposed rating definition focuses on "safety regarding timely receipt of payments from the investments". Fitch's global methodologies have always focused on both credit and market risks for the evaluation of mutual funds and its new rating scales and methodologies for money market and bond funds mirror SEBI's categorisation.
Fitch will therefore rate short-term funds whose market and liquidity risks are considered extremely low by the agency, notably Indian liquid funds, on the short-term scale. As such, the outstanding Indian MMF rating of 'Fitch AAA(mmf)(ind)', applicable to liquid funds, will be converted to 'Fitch A1+mfs(ind)' under the new scale. Short-term funds with marginally higher risk profiles - in terms of liquidity, maturity and credit quality - will be rated 'Fitch A1mfs(ind)'. As such, the ratings of short-term funds will be capped at 'Fitch A1mfs(ind)' unless the asset management company manages liquidity and market risks at a level comparable to a liquid fund.
Short-term funds whose risk parameters do not allow capital preservation and/or investor liquidity under stressed market conditions, as per Fitch's criteria, will be rated on the long-term scale. Consistent with Fitch's MMF rating criteria, as detailed in the global MMF and national criteria, short-term fund ratings will continue to evaluate the impact of credit, liquidity and market risks on the ability of such funds to preserve capital and provide liquidity to investors.
Fitch will continue to rate long-term bond funds on the long-term scale. Consistent with its bond fund rating criteria, the ratings will continue to reflect the current and prospective credit quality of the underlying assets, their maturity and concentration. For such funds, Fitch will continue to simultaneously provide a volatility rating, mainly reflecting portfolio duration and liquidity. The agency believes that long-term bond funds can exhibit different sensitivities to market risks for the same underlying credit quality, and therefore an additional rating is needed to provide a full picture of a fund's risk profile.
Fitch's fund ratings will continue to include an assessment of the fund manager's capabilities and the fund's operational set up.
Fitch will shortly review its fund ratings and subsequently publish a report on the evaluation of Indian fixed income funds.
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