When you’re researching mutual funds, you’ve no doubt seen the mutual funds rating as part of the fund’s listing. These ratings can be very helpful to investors, as they provide good insight into how well the mutual fund has been performing. The most common rating system for mutual funds is the Morningstar Mutual Funds Rating system. Nearly every website that ranks mutual funds will show the Morningstar rating as one indicator of the fund’s viability.
Morningstar categories group similar funds together. This way the investor who is putting together a portfolio can build using specific investment categories. Funds in the same category can be substitutes for each other. You choose based upon which fund in the category best meets your needs. Grouping similar styled funds together ensures that investment styles are treated equally, helping investors select funds in a combination that creates true diversification.
Morningstar’s mutual funds ratings are shown with one to five stars, with one star being the worst and five stars being the best. The mutual fund rating is determined by the fund’s “Risk Adjusted Return”, a Morningstar term. This Morningstar term is designed to measure consistent good performance over an extended period of time. The RAR is kept as part of the fund’s rating, and each new RAR (which is recalculated monthly) is compared to the fund’s three and five year RAR ratings. This means that Morningstar funds with a four or five star rating have produced better results with lower volatility than a fund with a one or two star rating. This mutual funds rating system is mathematically quite complicated – but it’s actually all designed to give the investor a simple way to rate the overall success of a mutual fund they’re considering buying.
A mutual fund rating, whether it’s Morningstar’s or someone else’s system, is just one of the things you should consider when choosing a mutual fund. A mutual funds rating system is a good indicator of the mutual fund’s performance, to be sure, but the mutual fund must be right for your investment needs, too. The very best long term growth mutual fund will not help you meet your investment goals if one of the things you really need is regular dividend income.
It’s important to evaluate what you need in a fund, before you consider the mutual fund’s rating. Your choices in mutual funds will be different if you want to see significant growth in your money and are willing to have dividends reinvested to accomplish this than if you want a stable investment that provides reliable income. Once you’ve determined your investment needs, and how much risk you’re willing to assume in your investments, then you’re ready to begin looking at mutual funds ratings, to see which ones have performed well over the last few years. These mutual funds ratings can be very helpful at making you feel comfortable that the mutual fund is likely to perform for you.
Once you’ve found a fund with a mutual fund rating that is desirable and a fund that is geared toward your personal investment needs, you should also consider the costs of the fund. All mutual funds charge fees, but some are definitely a better deal than others. It pays to shop around to ensure you’re getting good fund management at the best cost.
Choosing the right mutual fund for you can seem like a daunting task. But with investment tools available like mutual fund rating systems and fund information, you can sort out the right fund for you in no time.