Understanding mutual fund ratings is another critical aspect of successfully investing in mutual funds. Using the ratings, you’ll be able to know how well any fund is performing. The mutual funds that are performing the best will get the top numerical ratings. You can well imagine what kind of impact these ratings have on the decisions investors make. Unfortunately, the ratings are hard to come by because of the small number of companies which offer them.
Even With Ratings, Proceed with Caution
Even though ratings on mutual funds are based on what experts feel will be the growth and performance of the fund in the future, you can’t just blindly rely on the ratings. There are just too many other factors that can also affect the way a mutual fund performs. A good indicator of how a fund will perform in the future is to study its past performance. However, there is no way to predict the future 100%.
If you can find an identical type of mutual fund so that you can study its performance, it may help give you ideas of how the similar fund will perform. Look for funds that invest in similar assets and perform on the same level. Funds that are this much alike generally perform in much the same way. You can know that if the identical fund you are tracking loses money, the fund you looked at initially will, too.
Most often, funds with higher ratings will outperform all other funds other than those much like themselves. Because two funds are based on the same assets, it stands to reason that they will continue to perform in much the same way.
Check Out Morningstar
Mutual fund rating systems, as mentioned before, are limited to only a few companies, because it’s very difficult to develop a reliable criteria on which to rate the funds. It takes a long time to come up with a tool that will give reasonably accurate predictions. Therefore, if you use ratings in your decision-making process, you’ll want a company with a long, proven track record.
One company you can rely on for mutual fund ratings is Morningstar. Morningstar uses a simple rating system which consists of recommendations based on the number of stars a mutual fund has been given. A one-star fund will be the poorest performer whereas a five-star fund will be at the top of the performance ladder. It doesn’t take much investment expertise to understand a rating system like this one.
Like all rating services, Morningstar can only predict based on past performance. As you know, there’s no assurance of future performance in any stock or fund. As long as you only use ratings to help you choose mutual funds which you will study in more detail before deciding to invest, you’ll make playing the rating game into a winning proposition.