Understanding the Morningstar Star Rating

The Morningstar Rating is a helpful way to screen funds, but it's only a starting point.

Marta Norton 16 July, 2008 | 10:07AM

Many investors buy funds based on the Morningstar Rating, our quantitative rating for funds (we also offer qualitative research reports, and qualitative ratings). Those odds make sense. The star rating reflects strong performance, and investors tend to flock to those funds.

Unfortunately, finding a top performer isn't always that easy. As we've pointed out in the past, a high Morningstar Rating isn't a guarantee that a fund will be a solid performer. A fund may very well have a 5-star rating because of its impressive historical record, but, as performance-chasers often find out the hard way, the past doesn't reliably predict future returns.

That's not to say that the Morningstar Rating doesn't serve as a valuable tool for investors, but it shouldn't be used in isolation. In this article, we'll walk you through what the star rating is, what it tells you, and what it doesn't. Finally, we'll discuss some other factors to consider, outside of a fund's star rating, when making decisions about which funds to buy and sell.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Marta Norton  Marta Norton is a senior fund analyst with Morningstar.

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