There are tens of thousands of funds to choose from, depending on your view
of the future of the markets. There are several companies that offer their own
mutual fund ratings based on their own criteria, to help investors find the
right fund for them.
Morningstar
Since 1985, Morningstar has been one of the premier mutual fund rating services. By assigning a rating of 1 to 5 stars, they have guided investors who have been looking for an edge for over 2 decades now. Starting with the company's risk score, the fund's 5 year return is then subtracted, resulting in a risk adjusted rating score. Of course, the problem is that the rating is highly biased to past performance and does not accurately reflect the current risk of the company. So while Morningstar is good at helping you determine which funds have a good track record, it doesn't help to determine which funds will do well in the future.
Lipper, Inc.
Older than Morningstar by almost 15 years, Lipper has been providing analysis for investors since 1971. Based on performance risk, each fund is assigned a rating based on the chances of an investor losing their money. The higher the rating, the better the odds of losing money. This 5 star rating system also factors in five different criteria (total return, consistent return, preservation, tax efficiency and expense) which helps to determine the real risk of the fund.
Business Week
Their Mutual Fund Scoreboard is carried annually in their magazine, but savvy investors can access that scoreboard at any time by going to Business Week's website and accessing the Mutual Fund Scoreboard, which is updated monthly. They rate funds on quite a few different criteria, but they obtain the overall rating by assessing the performance over a five year period, based on risk adjusted returns. They deliver the ratings in a letter grade with A being superior and F being very poor.
Schwab Mutual Fund One Source Select List
Schwab's experts have created a list of pre-screened, no load, no transaction fee funds. This list is updated quarterly and utilizes a list of strict criteria to arrive at the ratings. These criteria include a minimum three year performance track record and have a minimum of $40 million in assets (in most cases). The funds that make the list are rated on risk, performance, diversification and other factors.
The wise investor will not rely on only one rating system, but, in fact, several in order to obtain a clear picture of a mutual fund's risk factor. While past performance of a fund may shed a little light on the fund's risk factor and viability, future performance can not be predicted based solely on this criteria. A complete picture of the company and the fund must be obtained in order to fully assess the potential risks and strength of the fund. Even then it is not an exact science and there are no guarantees.
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