What are some of the mutual fund rating services and what do they do?

There are several independent rating firms that analyze and rank mutual funds based on their performance, risk and other factors.

One of the most respected independent rating firm is Morningstar. Morningstar's rating analysis takes into account both a mutual fund's performance and risk and assigns a rating from one to five stars. To determine a fund's star rating for a given period (three, five, or ten years), the fund's Morningstar Risk score is subtracted from its Morningstar Return score. If the fund scores in the top 10% of its broad investment category (equity, hybrid, taxable bond or municipal bond), it receives 5 stars (highest); if it scores in the next 22.5%, it receives 4 stars (above average); if it scores in the middle 35%, it receives 3 stars (neutral or average); if it scores in the next 22.5% it receives 2 stars (below average); and if it scores in the bottom 10%, it receives 1 star (lowest). Star ratings are recalculated monthly. [Top]

What is a company's prospectus?

A prospectus is a printed summary of information that a company must file with the Securities and Exchange Commission in conjunction with a public offering of securities, including mutual funds. It contains information about the company and its business that helps investors decide whether to invest. SEC regulations determine what must be included in the prospectus. It typically contains information about the company's products, services, management and financial history. It must also discuss the risks involved. If the security is a new mutual fund, the company will discuss the types of investments that the fund will make. The SEC does not endorse the security nor the information presented in the prospectus.

Like a blueprint, the prospectus tells you everything about the fund, such as the investment objective(s), risk considerations, the investment manager, the portfolio manager, securities that the fund can purchase, investment restrictions, sales charges, management fees, expenses, procedures for buying and selling shares, shareholder services, dividend and distribution policies and past financial information. [Top]

How should I track the rate of return on my investments?

The best measure of performance is called total return. This combines all interest, dividends, and capital gains distributions with changes in the market price of your investments. It is a far better yardstick to use than just the change in price over a period of time. To see how well your investments are doing, start a quarterly performance record. List all your investments and their current value. Then list their value at the end of the quarter. Each quarter's ending values should include all reinvested interest and dividends. Add any interest and dividends received during the quarter to the ending value and subtract any contributions made during the quarter. From this total ending value, subtract the total value at the beginning of the quarter and divide the result by the beginning balance. This gives you the total percentage return for the quarter, which may be positive or negative. Use the same approach for determining an annual return. Your online 401(k) account keeps a running tally of your mutual fund returns, which allows users to track dividend payments as well as daily price fluctuations. [Top]

How often should I check my mutual fund's performance?

Once you have done all your research and invested in a mutual fund, it's time to sit back and leave the rest of the work to the fund's manager. You can check on the fund's performance daily, but once a week or even once a month is probably enough -- especially if you're saving for a retirement that is years away. [Top]

What should I watch for in monitoring my mutual fund's performance?

Even the best-performing mutual funds can fall on hard times. But usually, sharp investors can spot potential problems and take evasive action before their mutual fund sinks in value. Here are some red flags that signal a mutual fund could be in for some rough sailing, from the National Network of Estate Planners in Denver:

1. The fund's management changes.
2. Its performance slips compared to similar funds.
3. The fund's expense ratio climbs.
4. Its beta, a technical measure of risk, increases.
5. Independent rating services reduce their ratings of the fund.
6. It merges into another fund.
7. There's a change in management style or a change in the objective of the fund.

No single one of these red flags automatically means a fund is slipping. But a combination of these factors should at least cause you to take a closer look and consider a switch. [Top]