Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal";...
Like bonds, insurance companies and a number of other financial products and institutions mutual funds are rated. Unfortunately there is no one rating system for such funds there are several different sets of ratings out there with Mornignstar’s being the most respected.
The typical ratings system is similar to that for bonds with A being the best and D or F being the worst. These systems are fairly straightforward and easy to understand but they are not always reliable. Some of them only take certain criteria under consideration and do not grade by funds by risks such as volatility.
Ratings and Returns
Most ratings systems such as that promoted by Money Magazine group funds into different categories such as large cap, mid cap and small cap. Cap refers to capitalization or the amount of money the fund has in it. Then give the funds in that category that have the highest return over a certain period of time usually five years the highest ratings.
The problem with this practice that risk level are not part of the criteria. Funds that have high returns could have management teams that engage in risky practices or could be invested in potentially volatile markets and industries. These ratings usually do not take the fund’s strategy into consideration and instead are based purely on performance.
The Best and the Worst
Another common method is for a publication or website to put out a list of the best mutual funds in a category. Several business publications including Forbes and Bloomberg Business Week do this. The advantage to this system is that it lets investors know what the best are.
Forbes gives the top 5% an A+, the next 15% an A, the next 25% a B, 25% a C, 25% a D and the bottom 5% of funds an F. It also puts an all start list of what its’ analysts consider the best funds. Morningstar makes analysts picks available to its subscribers.
The drawback to this method is that these evaluations are based largely on the analyst’s opinion. In many cases the analyst is making what amounts to an educated guess or simply judging funds based on a set of criteria. It is entirely possible that the guess work could be wrong or the criteria will not include future market conditions. Such lists should always be viewed with a little healthy skepticism.
How to Use the Ratings
The best way for the average person to use these ratings systems is to use more than one set of ratings. Read several different lists and check to see which funds appear on different lists. That way you can have more than one opinion of the same mutual fund.
Something to remember is that the ratings systems usually will not take such factors as custom service into account. They evaluate funds on their rate of return not on the amount of time customers spend on the phone or the ease of use of their websites. Some business publications will occasionally evaluate funds on these criteria.
You should also remember that some highly rated funds may not meet your particular needs. Therefore you should do your own research and trust your own opinions as much or more than the lists.
How Safe are Money Market Funds
Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal";...
How Safe are Indexed Funds
Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 st1\:*{behavior:url(#ieooui) } /* Style Definitions */ table.MsoNormalTable ...
How Safe are Variable Annuities
Variable annuities are actually among the safest retirement investments around. There are some risks and potential risks associated with these investm...
