How To Find Good Investment Companies? Analyze Mutual Fund Ratings
How To Find Good Investment Companies? Research Mutual Fund Ratings
Good Investment Companies
Before we delve into the question of good investment companies, we first have to agree on what’s a good investment. To keep things as simple as possible, a good investment is one where the risk of you losing money is low, and the potential for you to make money (by it going up in value and/or earning you dividends) is good. With that definition in mind, you can picture a good investment as a company that’s consistently profitable, has room to grow and does so at a controlled pace, and whose management team is competent and battle-tested.
According to Wikipedia, an investment company is a company whose main business is holding securities of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses. Therefore, a good investment company is one that does a good job when it comes to investment choices and provides a healthy return on investment (ROI) to its investors.
Mutual Fund Ratings
As someone who’s looking to put money into a mutual fund, you want to know how they fare so that the one you give your business to is, hopefully, a good one. One of the best ways to make a financially savvy decision is to analyze mutual funds’ ratings. Those ratings will give you good insight on how each mutual fund is viewed by industry insiders, knowing that this view is shaped by how well they handle other people’s money.
Morningstar
Morningstar is one of the first companies that comes to people’s minds when they start talking about mutual fund ratings, one of the reasons probably being that they’ve been in the business of rating funds since 1985. As the most popular fund rating company, Morningstar uses a star system to rate funds, with five stars being top performers and one star being poor performers. The rating system is based on the company’s initial risk score of the fund. They then subtract that score from the five year return of the fund and arrive at a rating that is risk adjusted: they measure returns over at least three years and how much risk the funds took to earn them.
All funds get rated from best to worst within narrow categories like real estate, technology, small growth stocks or large value stocks. This way, funds earn their stars relative to other portfolios with the same goals. Stars are awarded on the basis of performance, risk and cost.
Standard & Poor’s Mutual Fund Management Ratings
Individual funds are assessed on a detailed and systematic process that covers an in-depth interview with the lead portfolio manager. Once a fund is covered, Standard & Poor’s produces a report covering key findings as well as other essential information about the fund. Each rated fund is systematically monitored in order to keep the rating up to date. The report includes:
- Analyst opinion
- The management style
- Background to the investment team
- Explanation of the performance and portfolio review
- Investment philosophy
The Standard & Poor’s Fund Management Ratings, based on an analysis of quantitative and qualitative factors, are seen as a seal of quality for funds.
Lipper Leader Fund Ratings
Older than Morningstar by almost 15 years, Lipper has been providing analysis for investors since 1971. The Lipper Leaders Rating System is a set of tools that guide investors and their advisors to select funds that suit individual investment styles and goals. Contrary to Morningstar’s rating system, under theirs, the more stars, the higher the odds of an investor losing money. Lipper uses five criteria in ranking mutual funds: total return, consistent return, preservation, tax efficiency and expense. The Lipper Leaders Ratings System uses investor-centered criteria to deliver a simple, clear description of a fund’s success in meeting certain goals, such as preserving capital or building wealth through consistent strong returns. They do factor in past performance, but the system seems to be more focused on analytical formulas than on past performance.
BusinessWeek Mutual Fund Scorecard
BusinessWeek publishes the “Mutual Fund Scorecard” annually in their magazine, but it can be accessed online at their website. On the website, the Scorecard is updated monthly. They rate funds on quite a few different criteria, but they obtain the overall rating by assessing the performance over a five year period, based on risk adjusted returns. They deliver the ratings in a letter grade with A being superior and F being very poor.
Schwab One Source Select List
Schwab’s One Source Select List uses “rigorous criteria” to establish a list that is published quarterly and outlines their version of top ranking mutual funds. Schwab’s experts have created a list of pre-screened, no load, no transaction fee funds. This list is updated quarterly and utilizes a list of strict criteria to arrive at the ratings. These criteria include a minimum three year performance track record and have a minimum of $40 million in assets (in most cases). The funds that make the list are rated on risk, performance, diversification and other factors.
There’s always going to be those mutual funds that invest into hot trends or who might have the manager with the current “hot hand”. Remember that while investors may enjoy healthy returns, it’s likely to be only temporary and that whatever’s “hot” right now will eventually cool off. If you really want to adopt the “get rich slowly” approach, invest into stable industries and services are always in demand regardless of the economy You might have to do some digging though, because they’re not “sexy” and will most likely be little-known. Many industries such as the electronics, technology, and real estate are heavily dependent on the state of the economy. Before investing in mutual funds or any other investment company, be sure to keep these factors in mind. As tempting as it can be to jump onto the band wagon of popular “investment opportunities”, always do your research ahead of time, make use of rating systems and consider investing into stable industries and companies.
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