Home

Blog

About

Contact

For Beginners

The Beginners Guide to Investing
What Are Mutual Funds?
The Definition of Mutual Funds
The Mutual Fund Basics

Mutual Fund Investing

How Do Mutual Funds Work?
Mutual Fund Investing For Dummies ... And Everyone Else
How To Compare Mutual Funds

Research and Analysis

Rating Mutual Funds
Mutual Fund Research
The Various Types of Mutual Funds

Bond Funds

The Best Bond Funds
Municipal Bond Funds

Stock Funds

The Best Stock Funds

No-Load and Index Funds

Index Mutual Funds
The Best Index Funds

Investor Info

Smart Investing
Mutual Fund Investment Advice
Our Privacy Policy

Rating Mutual Funds

Rating mutual funds can be tricky. It can be tough to separate the good funds from the bad funds, even for an experienced investor.

Mutual fund ratings can help you find the best mutual funds. They are easy to use and they can save you time. However, ratings are only useful if you understand what they are telling you. If you invest in mutual funds, it's important to understand mutual fund ratings and how they work.

Everyone uses a different system when rating mutual funds. Some investors rely on professional ratings, and some people choose to do it themselves.

You should choose the system that works best for you. I can show you a few different methods for rating mutual funds that are simple and effective.

Professional Mutual Fund Ratings

Most financial advisors and investors use professional ratings to "weed out" the bad funds. There are some benefits and some drawbacks to using them.

Professional ratings give you a quick snapshot of how well a fund is doing. Ratings can guide you in the right direction, but they don't give you the full picture.

Companies like Morningstar, Lipper, and Standard & Poor's rate mutual funds based on their past performance and current holdings. Their ratings can't give you an idea of what a fund will do in the future.

If you've ever read a mutual fund's prospectus -- and you should -- you've seen the disclaimer, "past performance does not indicate future results." It's absolutely true; that is why professional ratings don't give you the full picture.

The most savvy investors know when to look past the ratings to find a great opportunity. For example, ratings are useless on index funds and brand new mutual funds. Index funds are designed for average performance, so they should always have an average rating. Ratings on new funds with very little performance can also be very misleading.

Professional ratings can be a learning device. If you find a five-star fund, you can research that fund and find out why it has performed well in the past. Ratings can help you learn the characteristics of a great mutual fund. That will add to your experience and help you find the best investments in the future.

You should consider professional mutual funds ratings as a tool to guide your investment decisions. Ratings can be helpful as long as you don't focus too heavily on them. There are many other tools and strategies you can use to evaluate mutual funds.

I recommend that you gaiin as much information as possible before you invest. You can do that by using all of the investor tools at your disposal. Next, I'll show you some of the tools I use when rating mutual funds.

How I Rate Mutual Funds

When I rate a mutual fund, I typically focus on three things: the mutual fund's strategy, benefits, and results.

First, I always consider a fund's strategy. It is important to ask, "where is my money going?" You should only invest if you can answer this question.

It sounds obvious, but think about it for a moment. Someone investing in the U.S. will have different considerations than someone investing in Europe. If I own stocks in a business, I have different risks and than someone who is lending their money to someone with bonds. If you know where your money is going, you've taken the first step to understanding your investment.

The prospectus can provide you with useful information on a mutual fund. It is basically a big, boring book that explains a fund's strategy. The sections that explain the fund's goals and investment objectives are the most important. These are normally one or two pages.

Once I've looked at a fund's strategy, I look at the benefits of investing in the fund. Low risks, low costs, and high returns are huge benefits for any investor. These three factors have a huge impact on an investment. If a mutual fund has very few benefits, I move on. If a mutual fund's benefits don't match my investment needs, I keep looking. By this time I usually find a few good mutual funds to consider.

Finally, I compare the results for the mutual funds I have found. I research each fund in detail. I look at performance statistics, I call the mutual fund company, and I research online to find out as much information about a mutual fund as possible.

I hope this gives you some useful ideas. Feel free to try out my method. You can also check out How to Compare Mutual Funds to learn more about my evaluation process. Eventually you may develop your own process for rating mutual funds that works for you.

Return from Rating Mutual Funds back to The Home Page.