Mutual fund rating provides a simple method of comparison where advisors and investors can easily use the rating as a selling point. The rating agencies provide mutual funds a free advertisement. So what goes on with the rating? What does a 5-star rate mutual funds mean? Should investor focus on other things besides the rating?
Not all mutual funds are good for investment. With the help of data, pinpoint how the mutual fund is performing against its peers. There are over 20,000 mutual funds. The best is 5 stars rated. They include:
Driehaus Emerging markets small cap growth fund
With $319 million in assets, DRESX exhibits best growth prospects across the world markets. However, it’s most often overlooked by investors making it as less asset class. The large-cap EM index is mainly composed of state-affiliated companies, commodity producers and companies who growth is dependent on the global gross domestic product.
Small-cam EM insists more on domestic economies, tapping into the long-term trends favorable urbanization, demographics and emerging middle class and rising consumption. While the fund three-year performance has been under intense pressure, the long term member has enjoyed benefits.
Roidgeworth Seix Floating Rate High Income Fund
The global central banks are keen on keeping the interest rates low. This has led to inflation in the value of investment grade and government bonds setting up a disaster for income investors. The reason for such low rates is to create business spending leading to more jobs and higher wages. This policy has been in play since America great recession with banks fearing slight hint of an economic downturn.
Vanguard FTSE All-world ex-us Index fund
Stocks are expensive but that should not turn you off. Look at today’s stock prices. Use comparing valuations and you will see how fast they stack up. Use shiller’s cape ratio which evaluate the price of a stock compared to its historical earning. The average result is 16.71 based on data beginning in 1871 60 October 2016.
Those are just but the best mutual funds to invest. Of course, there are much more. However, let’s take one 5-star rate mutual funds – Rates and Reviews agency and see how credible such system of rating are.
Originally, the rating was a concept of risk and cost-adjusted return on an average investor. Funds were divided into basic categories with the risk evaluated by comparing the performance of the last three months or 90 days.
The star rating system is quantitative. However, other aspects such as historical performances, investment process, parent form and current price are incorporated.
What makes a 5 star mutual fund?
Star rating is largely determined by historical returns and volatility. Funds are put into categories scores are determined by a scale. For example, if a fund is 3-5 years old, the overall star rating will be the 3-year star rating.
Does the star rating the best way to select a fund to invest?
Let’s take an example of a rating agency, Morningstar. This agency has been a subject of a critic in the past as past performance does not guarantee a future result. This is not new, as every popular rating system constantly comes under attack. Most of the result from different agencies seem to agree on one thing, a mutual fund with low expense ration have favorable returns whereas high rated mutual fund produce market-beating returns a fraction of the time.
Generally, the rating system gives an investor a sense of each fund risk and how a fund will perform relative to its peers.