Morningstar is a Chicago-based investment research firm that compiles and analyzes mutual funds and stock for the North American, European, Australian and Asian financial markets. Morningstar is a reputed and reliable source of investment analysis for millions of investors whether they are beginners or experts in investments.
The company is known for its star ratings of funds, the world over. It assigns star rankings from one to five based on the past performance of the fund in relation to other similar funds. A good or bad Morning star ranking can literally make or break a fund in the market.
In this article, Finserv MARKETS explains the benefits and drawbacks of using Morningstar to analyze mutual funds or top-performing ULIP funds.
How do the Morning star ratings work?
Morningstar only considers those funds that are at least 3 years old and issues ratings based on its performance for the last 3, 5 and 10 years. The ratings are recalculated every month based on the fund’s Morningstar Risk-Adjusted Return which takes into account past returns and volatility. Then, the fund is compared against its peers or those in a similar category using the following scale:
- A 3-year rating is given to a fund that is 3-5 years old. The overall star rating is based on its past performance of three years.
- If a fund is 5-10 years old, its overall rating will be 60% of the 5-year rating and 40% of the 3-year rating.
- If a fund is over 10 years old, its overall rating will be 50% the 10-year rating, 30% the 5-year rating, and 20% the 3-year rating.
10% of all funds are assigned a Morningstar rating of 5 stars for having the highest risk-adjusted return. Each category of funds, which includes the next 22%, is assigned 4 stars. 35% of mid performers are rated 3 stars and the second last performer, which includes 22% of funds are allotted 2 stars. 10% of the remaining receives just 1 star.
Pros of using Morningstar ratings
Reliable and easy ratings:
For new investors who are well-trained about the dynamics of the financial markets, Morningstar comes as an easy and reliable source of guidance to select the best funds for investment. It helps them decide faster before making an informed decision because it’s a reputed international platform for investment analysis.
Free to use:
Though Morningstar has a subscription-based tool for investment experts, the free account is just as good for the common investor who doesn’t have much time or the inclination for research. With a free account, you get most of the research and information that you require as a beginner.
Easy to access information:
Morningstar gives you all the information about top-rated mutual funds and top performing ULIPs such as Bajaj Allianz Future Gain in one place. Apart from NAVs and prices, you can quickly look at other important information such as expense ratio, star rankings, turnover, and minimum investment.
You can use Morningstar’s portfolio tracking tool to keep yourself updated with progress in your investments. You can save your existing investments or create an imaginary portfolio to track movement regularly and get quick updates.
Cons of Morningstar rankings to analyze funds
Every popular fund rating system has its limitations and so does Morningstar. It has been blamed that this ranking system only takes the metrics of past performance into consideration while ignoring other factors. Past performance is not always a guarantee for future results and they don’t take into account aspects such as expense ratio and fund managers.
Another problem with Morningstar is that it doesn’t take into consideration funds that are lesser than 3-year old. Which means that even if a new mutual fund or a ULIP plan outperforms the market, it will still not get a rating. Also, since the ratings start after 3 years, investors may lose out on a potential investment avenue to grow their wealth and it may be too late when they realize the value of the fund.
In conclusion, it’s not always a good idea to rely entirely on a ranking system to make your investment decisions and you must do your own research as well. However, reputed international rating agencies such as Morningstar lends credibility to any mutual fund or unit linked insurance plan that they recommend and their ratings are accurate most of the time.
Finserv MARKETS is the place to go shopping for top performing funds like the Bajaj Allianz Future Gain, that enjoy high Morningstar ratings and promise tax-free returns as high as 25% over a 5-year investment period. Also read in detail about the ULIP tax benefits you can avail with a Bajaj Allianz ULIP plan available on Finserv MARKETS.
To know more on ULIP investments in depth, you can check out these blogs:
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