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Mutual Fund Ratings And How We Benefit

Mar 29, 2008
Most people these days know the definition of a mutual fund, however many do not know what mutual fund ratings are. Mutual fund ratings are the numerical scale that is placed on funds to determine the history of their performance. Thus the best performing mutual funds will have the best mutual fund ratings.

Although the rating is not indicative of the amount a fund will grow or will perform, it is closely related. Judging by the history of the fund in which you are looking at you can often tell whether this fund will do the same or better than another similar fund.

If a two funds are of similar style and similar ratings they will normally tend to follow the same patterns. They will typically invest in the same types of assets and will usually perform on the same scale. Meaning that if one is making positive interest the other one should be too. And also the flip side that if one is losing money the other will normally lose money as well.

The style referenced above is essentially a term that is utilized by people in the mutual fund business to determine the majority of the stocks in which they invest. There are many different types of stock. There are mutual funds called large cap funds, small cap funds, real estate funds, cash funds, and emerging markets funds. These are just a few of the different style.

The key here is that not all funds with high ratings will perform the same as other funds with high ratings. For instance there can be a high rating placed on a real estate mutual fund and a high rating that is placed on a large cap fund. If the real estate market is declining then their fund will decline likewise. Also the large cap fund may be increasing because the market is good for those types of stock.

There is also the possibility that a large cap based mutual fund with the same rating of another large cap mutual fund will not perform in the same manner. For instance there are two different types of cap funds. One is the growth fund and the other is called the value fund. They are different in the fact that they focus on different types of stocks and thus they can perform differently than each other.

So now that you know a bit more about mutual fund ratings, you should be in a better position to figure out if the funds you are holding are right for you, and how well they stack up against their competitors. You'd be surprised at how many mutual funds cannot even keep pace with the indexes they are following. Knowing what the top ranked funds will help give you a better perspective.

Its important to remember however that ratings on mutual funds are like driving with your rear view mirrors. The image is a little distorted in that last years winner may be this years loser. Look at the longer term track record. Is there a history of consistently beating the index and its competition? Have a frank chat with your financial advisor and learn more.
About the Author
Mutual Fund Suitability Compliance - is your financial advisor matching mutual funds up with you in mind? Mutual Fund newsletters can help make you money, or help destroy your portfolio. Which large cap mutual fund is right for you?
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