When it comes to debt fund investments, credit ratings of companies issued by credit rating agencies is considered to be the guiding light for investors. If you are still in the process of familiarizing yourself with the significance of credit ratings when it comes to debt funds, here are a few things you need to know.

A credit rating is a numerical assessment of a government or private entity’s creditworthiness. For investors, this is an indication of the organisation’s chances of defaulting on its debt obligations or outstanding bonds.

Credit ratings are issued by rating agencies provide independent and objective assessments of the creditworthiness of organizations, companies and countries so that investors can figure how risky it is to invest in a particular debt instruement. Simply put, credit ratings throw light on an establishment’s financial stability and whether it will be able to meet its financial obligations. And this helps investors select debt funds issued by entities that are least likely to not pay the principal amount to them when the investment matures.

The long and short of ratings

Credit rating agencies have the authority to analyze and rate companies, governments, non-profit organizations, countries, securities and local government bodies. SEBI has the sole right to regulate and authorise rating agencies and the rating system in India falls under the ambit of the SEBI Regulations, 1999 of the SEBI Act, 1992.

The rating agencies consider various factors to gauge an entity's capacity to meet its financial commitments. These include financial statements such as balance sheets, existing debt burdens and the company’s ability to repay, lending and borrowing history, past credit ratings and future economic outlook.

The organization’s financial model is also considered when the ratings are determined. The balance sheet and the statement of cash also help in joining the dots with respect to how debt is used and the amount of cash it has. All of these elements carry a certain weightage when formulating the final credit rating. Once the bond rating agency has analyzed the entity, it gives a rating that can range from ‘AAA’ to ‘D’. ‘AAA’ credit rating is considered an excellent credit rating while ‘D’ is perceived as a poor credit rating. Thus, financial instruments with ‘AAA’ rating are the ones that carry the least risk while those with a rating of ‘D’ are likely to default or have already defaulted.

However, it is important to remember that it is not the job of the credit rating agency to pass a decision on whether an entity should get credit facility or not. Instead, their report makes it simpler for lenders to make an informed decision before they issue loans to a firm.

Some of the registered credit rating agencies in India that are authorized to calculate or draft credit scores or reports with financial institutions are: CRISIL, ICRA, CARE to name a few. To know the credit rating of a fund, you can check the website of the particular Mutual Fund (MF) or the asset management company (AMC). All AMCs declare their portfolios on a regular basis – usually monthly – in the form of a factsheet which can be downloaded from the website. The credit rating will be mentioned in the portfolio.

To know the credit rating of a fund, you can check the website of the particular mutual fund (MF) or the asset management company (AMC). All AMCs declare their portfolios on a regular basis – usually monthly – in the form of a fact sheet which can be downloaded from the website. The credit rating will be mentioned in the portfolio.

Conclusion

While ratings provide a comprehensive picture of an organization’s health and performance, they should not be seen as a guarantee of the fund’s performance in future. This is because credit agencies derive ratings by analyzing past performance data and that cannot be a certain indicator of future prospects. All the ratings can tell you is the amount of risk an investment would entail.

Hence it is imperative to glean details about the financial strength of the companies and also conduct an analysis of its business fundamentals whose instruments debt funds invest in. By doing this you can avoid making any erroneous investment decisions which can throw unexpected losses. If the jargon seems too confusing, it can be worthwhile to avail the services of an expert.

For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint, refer to the knowledge center section available on the website of Mirae Asset Mutual Fund

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.