Funds are usually chosen by those that want to cut down on the risk. The diversity of mutual funds allows for investing in more than one source. A mix of bonds, money market securities or stocks make up a fund in order to cut the risk of putting everything in one place. They are rated in order to help the investor chose which funds are right for them. Each company has its own standards for determining a fund's rating.
Most fund ratings are determined by the past performance of the company making the mutual funds available. The mutual funds performance is commonly tracked for a period of five to ten years in order to have a developed pattern emerge as to the performance. Being as the past is sometimes an indication of what the future holds it stands to reason that it should indicate future performance. This is not entirely the case as it is known that unless you can see into the future you will not know what the future holds with certainty.
For instance Morningstar gives one to five stars as ratings. The score the company first gets on the risk of the fund is what the system is based on. The performance of the fund for the previous five years is then taken away from the original rating. The reliability of this system is not very good as the performance is based on past numbers and can not accurately predict the future earnings or losses on these funds.
Lipper Inc ranks its funds based on prior performance. The worse the performance the higher the rating to indicate a larger risk, the lower the rating the better the performance has been. The total return, preservation, consistency of the return, its tax efficiency and the expense are all factored in to determine the fund's actual risks. This method should be more accurate in determining the actual risk and profit factor involved in the mutual fund.
These are just two of several companies that provide ratings on these funds. Research them and take the time to evaluate the past performance before going with one of these companies for investment advice.
When you rely on fund ratings to provide the needed investment information you should be sure to look at more than one ratings system. You want to follow the ratings company that has the most successful record of predicting the future potential of mutual funds.
Mutual fund ratings while they can be accurate at times are not something to base your future investments on alone. If you rely on these alone you may as be blind folded to pick your investments.
Invest your time wisely and visit MutualFundPlanning.com for more tips on how do mutual funds work and mutual fund suitability compliance and improve your portfolio today.
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