How are Best Mutual Funds Chosen?

You may have seen frequent announcements of the best mutual funds or the ten best mutual funds in the American market, by various financial research organisations or by market news media. Have you sometimes wondered about the criteria used for the rankings? High yield is not the only factor that decides the top ten mutual funds list. Market research experts use a variety of factors to determine which mutual funds should receive top billing. The weightage given to certain factors may be different in various analyses.

Some market research organisations such as Morningstar and Standard & Poor (S&P) have adopted the star rating system in which the top mutual funds are given 5 stars, with the lowest ranking fund receiving just a one star rating. Other funds tracking studies may release a list of top ten best mutual funds.

The mutual funds are frequently ranked according to the categories of their asset holdings such as Domestic equity funds, international equity, taxable fixed income (bonds), balanced funds and index funds. The rankings may also be categorised according to type of stocks held such as large cap or mid cap funds. Some recommendations concentrate specifically on top funds for retirement plans.

Uses of Best Mutual Funds Rankings for an Investor

The mutual funds rankings are intended for the average investor who may not have the time or expertise to evaluate different mutual funds. As an investor, you can use these rankings in the following ways:

• Decide the mutual fund to invest in - With evaluations and rankings of best mutual funds, market research organisations and experts can help an ordinary investor decide which mutual fund to invest in.
• Learn to evaluate - It is a good idea for an ordinary investor with basic knowledge of financial markets to know on what basis the best funds are determined. This information can help the investor develop an evaluatory approach to fund investing over a period of time.
• Match individual financial objectives with best fund list - An investor can also see if his or her own investment objectives tally with the objectives of the ranking of funds. For example, some rankings may focus on long-term investment mutual funds, while the financial objective of the investor may be maximum returns within a three-year period. It may also be vice-versa. A list of high yielding but riskier best mutual funds list may not be the right guiding information for someone planning a retirement fund.
• Monitor mutual fund performance - Investors can see how the mutual fund that they have invested in is performing in the current market scenario or against other rival mutual funds.

Best Mutual Funds Investment - Morningstar Rating Factors

Morningstar was created in 1984 by Joe Mansueto in Chicago to provide investors with information about the US mutual funds market. Today, its extensive website at www.morningstar.com and investment research data is invaluable in keeping tabs on the mutual funds market across the globe.

Morningstar gives the highest 5 stars rating to the best mutual funds investment, which tops all its evaluating criteria. The mutual funds ratings keep decreasing to 4 stars and finally to 1 star for the lowest rating. The ratings are based on objective financial data and are not subjective.

Mutual funds are evaluated every month and the ratings also are applied on a monthly basis. The ratings can give you a good idea of the previous performance of the fund and of current best mutual funds.

Let's take a look at the factors considered by Morningstar for deciding the best mutual funds investment.

• Total Returns of a mutual fund - The performance of a fund is measured in terms of its total returns over fixed time periods of 3 years, 5 years and 10 years. The total returns are load-adjusted, that is, the sales charges are taken into account in its factoring.
• Risk of a mutual fund - Some mutual fund portfolios may be riskier than others. Some high yield mutual funds may have more potential for loss. For example, funds investing in Government bonds have less risk than investing in corporate bonds. Morningstar can lower ratings for high-risk mutual funds.
• Place in the fund category - In deciding the best mutual funds investment ranking, the top ten percentages of funds in a category are given 5 stars and the next 22.5% are given 4 stars, while the last 10% of funds in a category earn a single star.

A list of ten best mutual funds according to size and amount in investments is also released frequently. The latest data as on September 16, 2010 in Morningstar's Fund Spy section shows Vanguard mutual funds having the largest total net assets of US$ 1.1 Trillion and a market share of around 15%.

Best Performing Mutual Funds - S&P Awards for Mutual Fund Excellence

Standard & Poor (S&P), which is a premier financial rating and investment research, group in the US, releases an annual list of best performing mutual funds in various categories in the US. S&P showcases its evaluation in the form of annual awards called "S&P Awards for Mutual Fund Excellence".

The best mutual funds finalists for 2010 awards have been released and the actual awardees will be decided in November 2010.

In its proprietary rating system, some factors S&P uses to decide the best performing mutual funds include:

• Fund performance relative to competitors in category during a specified period
• Fund portfolio quality
• Risk inherent in the mutual fund portfolio investments
• Mutual fund manager track record
• Expense ratio or costs associated with investing in the fund.

While Morningstar does not include factors related to mutual fund manager and expense ratio, S&P includes such factors in its evaluation.

Based on the rating system, the S&P 2010 finalists for the best mutual funds in the US for Global Equity Funds category are American Century Global Growth Fund (TWGGX), Oakmark Global Fund (OAKGX) and Tweedy Browne Value Fund (TWEBX).

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