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Ratings

Mutual funds are rated by Morningstar, a major provider of information about mutual funds. Morningstar uses a five-star rating system, with five stars the highest rating and one star the lowest rating. Many mutual fund companies run ads to tout any funds they manage that achieve high ratings, particularly five stars. The “star” system has become well known among investors.

Morningstar ratings are widely used by investors, who often search for funds with at least four stars, and preferably five. They feel that such a rating is a likely predictor of future success. However, it is important to note that this rating system is measuring historical risk-adjusted performance for funds that have at least a three-year history. The ratings take into account both a fund's risk relative to its category as a whole, and its returns, taking out the sales charge on a monthly basis.


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