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Mutual fund ranking is performed by financial analysts to assist investors in choosing a mutual fund. There are numerous factors considered in mutual fund ranking, although each firm that ranks a mutual fund is likely to consider different things and give more or less weight to different concerns. Still, some common factors used when ranking mutual funds include the fees and costs associated with the fund management and the performance of the mutual fund over time.
Mutual funds are a form of investment wherein numerous investors put their money together. The mutual fund manager then uses all that money to invest in various stocks and other types of investments. The major benefit of investing in a mutual fund is that it can allow an investor to buy one item yet still have a diverse portfolio wherein his money is spread around into many different things. This way he does not take the risk of putting all his investment capital into one company that could fail.
Investors, therefore, are primarily concerned with how well a given mutual fund will perform and of whether a successful return on investment can be made. The mutual fund ranking system that is employed by most firms who rank funds is thus focused on the factors that most directly impact the investor's ability to make a profit on his investment. Thus, the first and most important factor in mutual fund ranking is normally how the fund has performed.
Most ranking systems look at the funds over a period of time. The ranking system may evaluate the fund's growth and return on investment over a one-year period, a five-year period or a 10-year period. Funds that have performed well over the longest periods of time generally have the highest ranking.
The performance of the fund, or return on investment, may also be compared to other financial metrics. A fund that consistently beats the Dow Jones industrial average or the S&P 500 index, for example, may be ranked higher. The return on investment used for this and all other comparisons regarding returns refers to the amount of money an investor gets back on top of the capital he puts in.
The other important factor in a mutual fund ranking is the cost of the funds. Fund managers charge fees and commissions for the management of the fund, but these fees should generally be a small percentage. The higher the total fees and costs associated with buying a mutual fund, the more the investor has to make to turn a profit, and generally the lower the fund will be ranked.