What you need to know about Morningstar Fund Star Ratings

Morningstar clearly influences individual investors in their selection of mutual funds. Studies have shown that more than 90% of all money flowing into mutual funds goes into funds with 4 or 5 star ratings.

Morningstar has said from the very beginning that its star ratings are not predictive. In fact, it's fairly easy to find Morningstar analysts who suggest buying funds with low ratings or selling funds that get higher marks, but that hasn't stopped investors and financial advisers from wishing on their stars.

The consequences of large inflows of money into 4 and 5 Star funds include:

• Style change because the Manager takes on more risk often causing lower returns or star ratings changes because the fund moves to another style category
• Lower returns because the larger the amount of funds the Manager has to invest, the smaller the universe of potential investments
• Higher capital gains distributions and associated taxes as the portfolio's turnover increases and the money flows from the fund causing redemtions.

If you need help selecting funds that will maintain their 4 and 5 star ratings, tax efficiency and beat 90% of the other funds, or for a free portfolio review, contact Visible Investment Advisors