Extending Chapter 10: Mutual Fund Investments

What You'll Do and Learn

• You'll extend your understanding of how mutual funds are evaluated by independent ratings agencies such as Standard & Poor's.
• You'll learn about Standard & Poor's Select Funds and the standards that are used to choose funds for inclusion in the Select Funds group.

Introduction

In this activity you will learn about using information from independent rating agencies to help you choose mutual fund investments.

Chapter Notes

In Chapter 10 you learned that there are many different types of mutual funds from which to choose. Within the broad categories of stock and bond mutual funds there are thousands of individual funds, each with their own investment objective and performance record. Making a choice from so many different options can seem overwhelming. Fortunately, help is available. Several independent companies, including Morningstar, Inc., Lipper Analytical Services, and Standard & Poor's, provide investors with valuable information that can help them make better investment decisions.

Morningstar, Inc. provides fund ratings--from "one star" to "five stars"--based on a fund's performance record over time. A five-star rating is the most desirable and indicates that the fund has consistently outperformed its peers. Lipper Analytical Services ranks funds according to their performance. Standard & Poor's compiles a shortlist of funds in various investment categories that S&P believes will continue to outshine the competition.

In comparing mutual funds based on performance, it's critical to make sure that the funds you are comparing have a similar approach to investing. It's also important to consider the fund's volatility (variability in total returns). Morningstar and Standard & Poor's Select Funds ratings help you assess these factors by grouping funds according to their investment approach and by assigning a risk rating.

Site Notes

Standard & Poor's Select Funds is a list of independent mutual funds grouped by investment category--growth or income, for example. To be included in the Select Funds list, individual funds must demonstrate a track record of strong performance and a consistent approach to choosing investments. The Select Funds Web site provides information about the criteria used to evaluate funds as well as general information about Select Funds.

Let Me Try

Go to the S&P site and then print the Worksheet activity.

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