How To Use Morningstar To Evaluate Mutual Fund Choices

With so many mutual funds out there, companies loudly promoting their own funds, and people giving half-baked investment advice, how can we know what funds are really right for us? The best route is to take advantage of independent research, and for me, the best choice for independent research in mutual funds is Morningstar.

What is Morningstar? Morningstar is a provider of independent investment research in the United States and abroad. They provide much of this information for free at morningstar.com. Basically, you can use this site to look up independent evaluations on any mutual fund you like – and other investments, too. Morningstar is so trusted that many funds will use their ratings from Morningstar in their advertisements.

Okay, so how do I use it? Hop over to morningstar.com and enter the name of a mutual fund you want to look at. For our purposes, I’ll take a look at the Vanguard 500 (here’s the Morningstar page for that fund in a new window). The first thing you’ll see is a boatload of information about the fund – an almost overwhelming amount to a beginning investor. If you’re overwhelmed, click on the “Data Interpreter” link on the left hand menu, which will automatically explain some of the data for you. I used the “Data Interpreter” heavily when I was just getting started with funds.

Information overload! What’s really important? The biggest things to look at when evaluating a fund with Morningstar’s data is to look at the “Key Stats” box in the upper right. The big things that I look at are the Morningstar Rating (which I’ll discuss below) and the Expense Ratio (which I like to be low). I also look at the trailing returns in the Performance section, but mostly at the five year trend.

What do the stars mean? Each fund evaluated by Morningstar is given a star ranking, from one to five stars, that evaluates the fund in a nutshell. If you want to understand how these stars are generated, Morningstar provides a strong explanation of what they mean. Generally, I don’t spend much time looking at anything below three stars, but if it’s three stars or up, I’ll look at it more closely (as many conservative and index funds are given three stars).

One bad thing, though… As you start to really get into the information provided, you’ll find that some of the neat stuff you want to look at requires a premium membership. What I did was make a lengthy list of things I wanted to look at, signed up for a 14 day trial of the premium membership, looked those up, then cancelled the service. It was worthwhile information, but I simply did not want to pay that much for a service I wouldn’t use with high regularity.

In short, Morningstar is a great place to look up fundamental information about a fund that you might see in an ad or hear about from a friend. It provides the real scoop without any bias.