Explained: What is quartile ranking in mutual funds and how to analyse schemes using this ranking

Quartile ranking is a statistical tool used to evaluate and compare the performance of mutual funds within a specific category. It divides funds into four quartiles based on their performance over a defined period. The rankings are typically based on returns, with the first quartile (Q1) representing the top 25% of funds and the fourth quartile (Q4) representing the bottom 25%.

How quartile ranking works

Mutual funds in the same category are ranked from best to worst based on their returns. These rankings are then divided into four equal parts:

• First quartile (Top 25%): The best-performing funds in the category.
  
• Second quartile (25%-50%): Funds that perform better than half but are not the best.
  
• Third quartile (50%-75%): Below-average performers but not the worst.
  
• Fourth quartile (Bottom 25%): The lowest-performing funds in the category.
  

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A fund's quartile ranking is an important indicator of how well it has performed relative to its peers over a given timeframe, such as one year, three years, five years or across any longer horizon.

How to analyze mutual funds using quartile ranking

While quartile ranking is a useful metric, investors should consider the following factors when analyzing mutual funds:

1. Consistency of performance

A mutual fund that consistently ranks in the first or second quartile over different time periods is a sign of stability and strong management. If a fund frequently moves between quartiles, it may indicate higher volatility.

2. Long-term performance matters

Short-term quartile rankings can be misleading. Investors should look at a fund’s quartile ranking over multiple timeframes to assess its long-term consistency.

3. Comparison within the same category

Quartile rankings should only be used to compare funds within the same category, such as large-cap, mid-cap, or sectoral funds. Comparing funds across different categories using quartile ranking may lead to incorrect conclusions.

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4. Other performance metrics

While quartile ranking helps in fund evaluation, it should not be the sole deciding factor. Investors should also assess:

• Expense ratios
  
• Sharpe ratio (risk-adjusted returns)
  
• Portfolio holdings
  
• Fund manager expertise
  

Quartile ranking is a valuable tool for mutual fund investors looking to compare fund performance within a category. However, it should be used alongside other fundamental and technical analysis tools for a well-rounded investment decision.

By evaluating a fund’s consistency and long-term performance, investors can make informed choices that align with their financial goals. One should always invest based on their risk appetite, investment horizon, and goals.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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