Independent research firms like Standard & Poor's, Morningstar and Lipper not only provide in-depth research on mutual funds, but also rate or rank them. A fund's rating is based upon how well a fund meets a specific set of criteria. Its ranking is its relative standing in comparison to other funds within the same category.
Standard & Poor's ranks funds based on their three-year Sharpe ratio, which is equal to the fund's return minus the return on three-month Treasury bills, divided by the fund's standard deviation.
The top 10% of funds in each style peer group receive five Stars, the next 20% receive four Stars, the next 40% receive three Stars, the next 20% receive two Stars, and the bottom 10% receive one Star. Each fund is then given a numerical ranking in relation to all other funds in the category.
Like Standard & Poor's, Morningstar ranks funds using a star system. In contrast, though, it bases its analysis on a fund's risk-adjusted total return, which accounts for risk and performance in the same evaluation.
Lipper evaluates funds based on how well the fund meets its investment objectives.
These and other research firms provide information and analysis on their Web sites. More detailed reports can be obtained through a subscription.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. A prospectus contains this and other information. A mutual fund prospectus is available through www.scottrade.com or through a Scottrade branch office. The prospectus should be read carefully before investing.