Ranking Methodology

The Morningstar rating methodology judges funds, or unit-linked insurance portfolios in this case, based on the 'Morningstar Risk-Adjusted Return' measure.
     Print Edition: February 2014
Money Today-Morningstar ULIP Rating: Methodology

It's not easy to rate the performance of Ulips given that post the implementation of new Ulip norms in September 2010, all old plans were discontinued and new ones adhering to the norms were introduced. It becomes even more difficult given that equity markets have remained relatively unchanged in the past three years. Even so, we've given it a go. The ratings are based on three-year compounded annual growth rate, or CAGR, for the period 1 January 2011 to 31 December 2013.

The Morningstar rating methodology judges funds, or unit-linked insurance portfolios in this case, based on the 'Morningstar Risk-Adjusted Return' measure.

There are three steps involved in calculating the Morningstar Risk-Adjusted Return (MRAR). The calculations are first done on a monthly basis and then the results are annualised. The three steps are:

Total Return: Calculate the monthly total returns for the fund. Funds are then rated for up to three periods based on trailing three-year, five-year, and ten-year returns. For this study, we have taken into consideration the compounded annual growth rate (CAGR) of the past three years (1 January 2011 to 31 December 2013).

Morningstar Return: Calculate or collect the monthly total returns for the appropriate risk-free rate. In our case, the yield on 364-day treasury bills is taken as the rate of risk-free return. Get the monthly geometric excess return of the fund vis-à-vis the risk-free return. (Geometric Excess Return=(Fund Return - Risk-Free Return) / Risk-Free Return. Geometric return is more appropriate when measuring excess returns over multiple periods.)

Risk is measured as the fund's average underperformance (average of the times when the fund has underperfomed the t-bill) relative to 364-day treasury bills. It is basically the variation in the fund's performance, with emphasis on poor performance.

Morningstar Risk-Adjusted Return (MRAR):
Adjust Morningstar Return for risk to get Morning Star Risk-Adjusted Return. Morningstar Risk is calculated as the difference between Morningstar Return and Morningstar Risk-Adjusted Return.

The rating accounts for all variations in a fund's monthly performance, with emphasis on underperformance. It rewards consistent performance and reduces the possibility of strong short-term performance masking inherent risk of a fund.

Funds are ranked by their Morningstar Risk-Adjusted Return scores and stars are assigned using the following scale:

5 stars: The top 10% schemes
4 stars: The next 22.5% schemes
3 stars: The next 35% schemes
2 stars: The next 22.5% schemes
1 star: The lowest performing 10%

CATEGORIES


Aggressive Allocation

These funds invest across multiple asset classes-equity, fixed-income, cash and precious metal exchangetraded funds, among others. These funds tend to make large allocations to equities. Allocation to Indian equities will usually range from 50-75% of total assets.

Moderate Allocation

These funds invest across multiple asset classes-equity, fixed-income, cash and precious metal exchangetraded funds, among others. The allocation to Indian equities will usually range from 30-50% of total assets.

Conservative Allocation

These funds invest across multiple asset classes-equity, fixed-income, cash and precious metal exchangetraded funds, among others. The allocation to Indian equities will not exceed 30% of total assets.

Large-cap Funds

Large-Cap funds primarily invest in stocks with the top 70% market capitalisation of the equity market. These funds invest between 65-100% of total assets in Indian equities and the balance, if any, can be invested in other asset classes, such as fixed-income or cash and cash equivalent investments.

Small-cap and Mid-Cap Funds

These funds primarily invest in stocks with the bottom 30% market capitalisation of the equity market. These funds also invest between 65-100% of total assets in Indian equities and the balance, if any, in other asset classes, such as fixed-income or cash and cash equivalent investments.

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