It’s Your Money Column – Morningstar Information

Question: I’ve saved some money and want to invest in a mutual fund? How can I decide which fund would be best for me?

Answer: One of the best independent sources of information that you can use to understand how well mutual funds have performed (in comparison with similar types of mutual funds) is "Morningstar Fund Investor." The Fort Collins library now subscribes, so you can do your sleuthing work at the library.

Morningstar Inc. provides information that is useful for individual investors and financial planners. The "Morningstar Fund Investor" is based on the 500 funds identified by Morningstar as the "industry’s best and most notable funds." There are articles about current mutual fund topics, but the section that will help you the most covers data on each of the 500 funds. Information covers how risky funds are compared to like funds, and performance averages covering year-to-date and 1, 3, 5 and 10 years. Expense ratios, sales charges and much more also are included.

Probably the rating that Morningstar is best known for-and most criticized about-is its star rating system. The formula, which I am greatly simplifying to answer your question, has two parts. The first evaluates how risky a fund has been compared to the 90-day Treasury bill. The second part of the formula uses performance data to compare a fund’s overall performance against the average of funds that have similar investment strategies. After calculations have been done for both risk and return, funds are ranked and given from one to five stars, with five stars representing the best.

Here is an example from the March 2002 issue that compares one of the best performing funds with one of the lowest-return funds. Fund A had an annualized yield of 12.3 percent for one year, 16.3 percent for three years and 15.7 percent for five years. The risk is rated low and it was ranked at the top or second for years 1, 3, and 5. Fund A is given a rating of five stars.

Fund B had annualized returns of minus 6.3 percent for one year, 3.2 percent for three years and 8.5 percent for five years. The fund’s risk level is considered higher than average, and it was ranked 75 for one year, 37 for three years, and 21 for five years. Fund B has a three-star rating.

My purpose in giving you this comparison is not to recommend that you buy Fund A. The purpose is to show you how much information you can get by reading publications that include valuable data. Check the library and study the material so you can make informed investment decisions.