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| Classifying Mutual
Funds: Reading the Label |
| If someone asked
you what vehicle you drive, you could give a general
answer such as, "A car," a more specific
answer such as, "A station wagon," or
an even more exact answer such as, "A Ford
Escort." |
|
| Likewise, there are lots of ways
to describe a mutual fund. You could group them
by how they're named--throwing all the funds with
"aggressive" in their title together.
The problem with this method is that fund names
can sometimes be misleading. And not everyone agrees
on what aggressive means. |
|
| In order to help you get a handle
on the thousands of funds out there, Morningstar
breaks down funds according to what they actually
invest in. In fact, we have three ways of categorizing
funds: by Morningstar rating groups, by category,
and by style box. |
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| Morningstar Rating Groups |
| Like the terms car and truck, Morningstar
rating groups are general descriptions. Morningstar
uses the four groups--U. S. stock, international
stock, taxable bond, and tax-free (municipal) bond
funds--as the basis for its ratings. |
|
| Comparing funds within a Morningstar
rating group is like comparing a truck with all
other trucks. You get a general idea of which ones
have the most horsepower, for instance, but you
can't make specific comparisons between, say, pick-ups. |
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| Morningstar Categories |
| Our categories are based on what a fund has actually owned over the past three years. They're very specific. We have 30 stock categories, ranging from funds that buy mostly technology stocks to those that buy mostly Japanese stocks. We also have 28 bond categories. |
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| Categories are great for helping you pick new funds, because you can see which funds in each category have performed the best. They're also useful for comparing the performances of the funds you already own with those of similar funds (such as when you give your plan its yearly review). |
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| Morningstar Style Box |
| A fund's style box is based on the
kind of stocks or bonds it owns right now. Think
of it as being the latest model of your fund. There
are nine style boxes for both stock and bond funds.
You can use the style box to see what your fund
has been buying and whether it has changed lately. |
