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Mutual Fund Ratings

infy | Feb 22, 2010 |

1 Comments | Rating: 0

The term mutual fund has been heard by the ears of most people today. Anyone who participates in a 401K or an IRA may know that they invest in them, but know little about them. Most investors are unaware that mutual funds are actually rated. Mutual fund ratings are the method by which mutual funds are evaluated for quality and performance. Though performance is key in evaluating a mutual fund, there are other factors involved in achieving a favorable rating.

Mutual funds are rated by a few different companies that have varying criteria. Morningstar has been the primary ratings company that is trusted and looked to throughout the mutual fund industry. Morningstar has created the most comprehensive criteria for rating mutual funds. For years they have handed out stars as symbols of excellence within a fund. Four star funds, like four star generals in the military are the highest ranking possible.

Mutual fund ratings tend to evaluate asset classes as a whole. Asset classes are generally areas in which specific funds focus in on. For example Growth funds for any mutual fund company have similar underlying investment objectives. What tend to be unique is the investment styles of each firm. It is something like comparing apples to apples, but looking at how the farmer picks them.

The primary benchmark to beat for many mutual funds that focus on growth is the S & P 500 Index. This index averages the overall performance of 500 varying stocks across several sectors. Though the S & P is the average to beat for the managers of funds with growth as their goal, their are mutual funds that actually mimic this major index. There are many mutual funds that copy the various indexes. Some are managed, while others are not. The best index funds are often those that are unmanaged. Some firms charge high expense and management fees to actively manage an index mutual fund. This fact alone can make them unattractive to potential investors.

Another alternative to index funds, are funds that invest in the largest companies listed on the major American stock exchanges. These funds are formally known as large-cap mutual funds. The best large cap funds usually invest heavily in stocks that are part of the Dow Jones Industrial Average. The Dow is the major index that has long been the symbolic pulse of the American stock market.

Whether an investor is buying shares in an index fund or a large-cap mutual fund, ratings can be an important element in the decision making process. The most important thing to remember for any investor is for them to properly assess their own risk tolerance first. Then the fun of researching the plethora of rated mutual funds can begin.