Investor Corner/The wider picture/Investor Protection
5.4.2 Star Ratings and Their Limits
Fund star ratings are a useful first filter based mostly on past risk-adjusted return, but they say little about cost, portfolio quality, or whether a fund's history was actually earned by the manager currently running it.
What a star rating is actually built from
Star ratings, whether from a fund research platform or an AMC's own factsheet, are generally calculated from a fund's historical risk-adjusted return relative to its category peers over one or more trailing periods. A five-star fund has, by this specific measure, delivered stronger risk-adjusted returns than most of its category peers over the period examined.
What the rating does not tell you
A high star rating says nothing about the fund's current expense ratio, nothing about whether the manager who built that track record is still running the fund today, and nothing about how concentrated or overlapping its current holdings are with funds you may already own. A fund can carry a strong historical rating while having quietly become a considerably weaker choice for reasons the rating simply does not capture.
Using ratings the way they are actually useful
A star rating is a reasonable way to narrow a large universe of funds down to a shorter list worth investigating further. It is not a reasonable basis for a final decision on its own, and checking manager tenure, cost, and portfolio composition after using the rating as a filter is what turns it into a genuinely useful tool rather than a shortcut that skips real diligence.
How PriLytics helps. PriLytics shows the real performance, cost and composition behind every fund you hold, giving you the fuller picture a star rating alone cannot. See holdings and returns.