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Mutual Fund Ratings

Investors who want to limit or reduce their risk often choose mutual funds. Mutual funds are a diversified group of stocks, bonds or money market securities that generate from more than one source. Because of their diversification, the risk involved is reduced or limited. Mutual fund ratings are used to help investors determine which funds are best for them, based on the amount of risk that is involved. Different companies determine the fund rating based on their own criteria.

Where To Find Mutual Fund Ratings

Morningstar

Morningstar has been rating funds since 1985. They assign one to five stars to various funds and use it as a guidance method for their investors who are looking to enhance their portfolio. The rating system is based on the company's initial risk score of the fund. They then subtract that score from the five year return of the fund and arrive at a rating that is risk adjusted. The problem here is that the rating system is based on past performance and has little value in determining the actual risk factor of the fund. This is probably not the most reliable source of determining future risk of your funds.

Lipper, Inc.

This company has been analyzing funds and helping investors select the best mutual funds for them since 1971. Lipper ranks funds based on performance risk, but is based on poor or risky performance meaning that the higher the risk, the higher the mutual fund rating. The lower the risk, the less chance the investor has of losing money. Lipper has a five point rating system that includes five different criteria (total return, consistent return, preservation, tax efficiency and expense) to help determine the actual risk of a 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 OneSource 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 their mutual fund 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.

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