Here is why I think Morningstar India is better for mutual fund investing – selection, review and analysis – than Value Research India. I am not affiliated with either portal in any way. This post is to encourage readers unfamiliar with the features of Morning Star to explore them in peace – without any transaction in mind.
Before I forget, on a side note, those who would like to understand different product categories and differences in investment mandates can explore the website of Franklin Templeton mutual fund (in peace).
Mutual funds can be analyzed in two ways:
quantitatively – with NAV and benchmark history alone, treating the fund like a black box.
qualitatively – by looking at the portfolio, studying the style of the fund management team, the source of alpha etc.
Star rating is a quantitative analysis and both portals have a similar rating methodology.
Morningstar has something known as “analyst rating” – gold, silver, bronze – which is based on qualitative metric. Although Morningstar claims that these are ‘forward-looking’ ratings compared to star ratings which are ‘backward-looking’, both analysis use only past performance (what else can one do?!). The only drawback is that these analyst ratings are done by humans (duh!) and therefore they are only available for some funds.
Personally I do not use mutual fund star ratings, but for those who want to, Morningstar is a better resource in more ways than one.
- The analyst ratings can be used along with star ratings for a more comprehensive review. This is important because, there are 5-star funds with a bronze rating and a 3-star fund with a gold rating.
- The risk & ratings tab in each morningstar fund page is simply awesome. It offers you 3-year, 5-year and 10-year (a) return grades, (b) risk grades and (c) star rating. This is a quick way to determine consistency in past performance.
Why I do not like star ratings:
- Value Research admits: “Don’t look for category toppers”
- The Trouble With Mutual Fund Star Ratings
- Here is why you should ignore mutual fund star ratings
- Part II: Here is why you should ignore mutual fund star ratings
The risk & ratings tab also provides risk-adjusted return metrics like beta, Sharpe ratio etc. for 3-year, 5-year and 10-year periods.
To learn more about these metrics: Visualizing Mutual Fund Volatility Measures
If you are comfortable with these metrics, you can screen mutual funds based on returns with the mutual fund screener, create a shortlist of about 5-6 funds and then look for consistent risk-adjusted performance at Morningstar. In comparison, Value Research does not even mention the duration over which these metrics are calculated.
If you do not like these metrics because they are difficult to understand or because you think they are not valid (since markets do not follow normal distribution –Value at risk (VAR): Would you buy a car with a faulty airbag!), then you can consider using downside protection as an alternative:
Downside capture is a measure of how efficient the fund is protecting investors when its benchmark falls. Upside capture provide the opposite information. Take any old fund which has done well and it would have suffered lesser losses than the benchmark. Consistent downside protection is the source of alpha.
Alternatively, you can also consider using my downside protection calculators:
Mutual Fund Downside Protection Consistency Analysis (graphical analysis)
If you now head over to the portfolio tab at Morningstar, you can find in-depth information of the holding style and more importantly holding style history. This will help us understand the correlation between fund size and holding style.
This information is not available at VR. Its style box only gives you information about the dominant holding style.
The detailed portfolio tab at Morningstar gives the entire portfolio (unlike VR) along with the date each stock was acquired. This can be used for understanding the investment strategy better.
The history tab of Morningstar contains asset allocation, equity style and stock sector histories. This can help understand how the fund management reacted to market movements.
In conclusion, MorningStar is a much better source for mutual fund analysis than Value Research. This is not about simplicity. Both portals have the same metrics. If you can navigate VR, you can navigate Morningstar.
Morningstar scores because it realizes the importance of reporting those metrics for different durations.