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Mutual Fund Ratings: Stars and More
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When you decide to see a movie, you look to see if it's been given a thumbs-up review. Mutual funds get rated based on performance, too, with Morningstar, Inc. playing the critic. Unlike a review, though, the Morningstar RatingTM is based on numbers, not opinions.
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The Morningstar Rating is a quantitative assessment of a fund's past performance–both return and risk–as measured from one to five stars. In general, five-star funds tend to outperform lower-rated funds on average, are generally less expensive, less volatile, and run by more experienced managers.
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The Morningstar Rating is intended for use as the first step in the fund evaluation process. It allows investors to distinguish among funds that use similar investment strategies. That said, the rating system isn't perfect and is not a substitute for doing your homework. For instance, there always will be a few duds among five-star funds and few diamonds in the rough in the lower-rated funds. And since the star-rating is backward looking, it can't predict how a fund will perform in the future. | |
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