Why Punji Doesn't Show Star Ratings

What a star rating actually compresses

A 5-star rating is popular because it is simple: one symbol, instantly comparable across hundreds of funds. The cost of that simplicity is that it blends several different things - past return, risk, consistency, sometimes even fund size and brand recognition - into a single score, using a weighting formula that is rarely made public. Two funds with very different strengths and weaknesses can end up with the same star count, and the rating gives no way to tell why.

A well-documented criticism of star ratings, across markets, is that they correlate with AUM more than a rating meant purely to reflect skill should. Larger, more established funds tend to get better ratings partly because size itself can be read as a proxy for trust or longevity, independent of whether the fund is actually performing better than smaller peers.

Testing that claim on real data

Using 24 Small Cap funds with both a reported AUM and a category percentile on 3-year rolling CAGR, the correlation between fund size and how well a fund actually ranks against its category peers is 0.165. That is close to zero, meaning fund size tells you almost nothing about where a fund sits in its category’s performance ranking.

The largest fund in this sample, ₹80,463 Cr, sits at the 70.83th percentile. A fund roughly half that size, ₹18,898 Cr, actually sits at the 41.67th percentile - higher. Size is simply not a reliable signal of where a fund ranks against its peers, which is exactly the pattern a near-zero correlation predicts. A rating system that lets size influence its score, even indirectly through weighting that favours older, larger, more “proven” funds, risks rewarding funds for being big rather than for performing well.

What Punji shows instead

Rather than one blended star score, Punji shows three separate profiles in the Fund Health Score - Quality, Safety and Compound - each computed purely from category-relative percentile ranks, with no input from AUM, brand, or how long a fund has existed. A fund is scored on where it stands against its category peers this month, not on how big or well known it is. Keeping the three profiles separate, instead of blending them into one number, also avoids hiding a fund that is strong in one respect and weak in another behind a single misleadingly average-looking score.

Frequently asked questions

Doesn’t a larger fund at least mean more investors trust it?

It can reflect past marketing success, brand recognition, or simply having existed longer and accumulated flows over time. None of those is the same as the fund currently outperforming its category peers, which is what the data above shows has almost no relationship to size.

Are star ratings always wrong?

Not necessarily wrong, but opaque. The underlying weighting formula is usually not published, so you cannot tell how much of a given rating comes from return, how much from risk, and how much from other factors that may have nothing to do with the manager’s skill.

How is the Fund Health Score different from a star rating?

It keeps three distinct profiles separate instead of blending everything into one score, uses only category-relative percentile ranks as inputs, and is recomputed monthly as the peer set changes, so it does not quietly reward funds simply for being large or long-running.