The American company Morningstar rates mutual funds according to their past performance. Morningstar’s rating system is called Star Rating and is used to help an investor choose which mutual funds to invest in.
Morningstar’s system follows three stages:
Stage 1: Every fund is assigned to one of 65 categories – 35 categories for equity funds and 30 fixed-income categories. The list of categories appears later.
Stage 2: In each category, the funds are listed in descending order from best to worst. The list is set according to a few parameters:
- The fund’s yield in the past 3, 5, and 10 years.
- The variance in annual yield.
- The expense ratio.