Using Morning Star to Evaluate Mutual Funds

As an investor, how can you know which funds are best for your situation? Taking advantage of independent researchers is a good road to take, and one of the best choices for independent researches in mutual funds is Morningstar.

What is Morningstar? They are a provider of independent investment research in the United States as well as internationally. Morningstar provides much of their information for free. (morningstar.com) You can go to this site to research independent assessment on any mutual fund you’d like as well as other investments. Morningstar is such a trusted tool that many funds will utilize their ratings in their own advertisements.

So how do I use it? Go to your computer and look up morningstar.com. Just enter the name of a mutual fund you’re interested in. Let’s take a look at Vanguard 500. First you’ll see a plethora of information about your fund. It will seem a bit overwhelming for a beginning investor. If you need help just click on the “Data Interpreter” link on the left hand menu, it will certainly tell you some of the data. You may need to use the “Data Interpreter” frequently when you first get started with funds. That’s all right, that’s what it’s there for.

Information overload! What’s really important? An important item to look at when you’re assessing a fund with Morningstar’s data is to examine the “Key Stats” box in the upper right. Be sure to look at the Morningstar Rating (which will be discussed later on) as well as the Expense Ratio (which should be low).  Also examine the trailing returns in the Performance section, but mainly at the five year trend.

What do the stars mean? Every fund examined by Morningstar is supplied with a star ranking, from one to five stars, that gives you the information you need for the fund. Morningstar gives you a detailed explanation of how these stars are generated. Normally, many investors do not spend much time checking out anything below three stars, however, if it has three stars or up make sure to take a look at it more closely because many conservative and index funds are given three stars.

One bad thing, although… As you begin to really get involved in the information given, you’ll see that some of the interesting items you want to research requires a premium membership. You can always make a list of things you want to look more closely at and then sign up for a 14-day trial of the premium membership. You can then take a look at the funds you’re interested in then cancel the service.

To sum things up, Morningstar is a great tool to check out fundamental information about a fund that you may have seen advertised or heard about from an associate. It gives you the good real story without any partiality.