Magazine article Medical Economics

Mutual Funds: Don't Let the "Stars" Get in Your Eyes

Magazine article Medical Economics

Mutual Funds: Don't Let the "Stars" Get in Your Eyes

Article excerpt

All-in-one ratings give you a quick take on performance, but there are better measures.

If you've ever researched a mutual fund, you've no doubt heard of Morningstar Mutual Funds.

Investors place a lot of faith in the company's one- to five-star fund ratings. And fund families don't ignore them, either: They proudly tout their top-ranked funds in promotional materials. So it's not surprising that 63 percent of current net fund assets are in four- and five-star portfolios.

Morningstar isn't the only game in town; Lipper Analytical Services and Value Line Publishing also assign broad overall ratings to mutual funds. However, I'll limit this discussion to Morningstar, because it's the company whose ratings you're most likely to see in personal finance magazines--and most likely to turn to when selecting your funds.

But should you rely on the star ratings or similar blanket performance measures? And if not, what should you look at?

Before I answer those ques .ons, first consider that Morningstar won't rate a mutual fund until it has been in existence for three years. After a fund's fifth and 10th birthdays, Morningstar calculates star ratings for those time periods as well as for three years. Where applicable, an overall star rating combines these periodic ones; the longer time periods receive greater weight than the shorter periods. To figure each rating for a fund, Morningstar compares its load- and risk-adjusted return with an average for one of four broad investment classes--domestic stock, international stock, taxable bond, or municipal bond. …

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