Now that you've got a little extra cash on hand, you want to put it to work for you so you can pay for all those expenses that you know are coming down the road -- kids, down payments, ballet lessons, braces, college, retirement. As you work your way through the financial planning process, a method to select good investments will be an important facet of your plan. For mutual fund investing, selection criteria are very useful when trying to decide between the thousands of available funds. The Lipper Rankings provide one of the most comprehensive sources of mutual fund ratings and rankings.
Lipper was started in 1973 by Michael Lipper with the goal of providing detailed analysis and information about the mutual fund industry. At the time of publication, Lipper was a division of Thomson Reuters, the news and information company. Lipper initially covered mutual funds in the U.S. and later expanded to provide global mutual fund information. The Lipper mutual fund data provide some of the most detailed sector and subsector rankings of mutual funds. Lipper mutual fund info is used and published by a wide range of well-known financial publications and websites such as the Wall Street Journal, Smart Money and Forbes.
Lipper ranks individual funds with a ranking of 1 to 5, with 5 as the top score. Funds with a 5 rating are also referred to as Lipper Leaders. Each mutual fund gets a separate score for the factors of total return, consistent return, preservation, tax efficiency and fund expense. As a result of the different factors, each mutual fund has five Lipper scores, with one score assigned to each of the five factors. A top-ranking mutual fund would rate 5 in all five categories. To further break down fund rankings, Lipper provides scores for a fund's three-year, five-year and 10-year results. Rankings and scores are updated monthly.
Using the Lipper Rankings
Lipper mutual fund rankings allow you to easily and quickly compare two or more mutual funds you may be considering as investments. A fund with mostly 4's and 5's over the different time periods has provided better returns to investors than a fund loaded with Lipper 1's and 2's. The different return factors allow you to select funds to meet your personal financial goals. For example, if you are most concerned with maintaining the value of your investments, you should look for funds ranked 5 for preservation. If you do not care about the ups and downs of the market, but want the best long-term returns, you should consider funds with a 5 ranking for total return. Lipper provides a mutual fund screening tool at lipperleaders.com. The tool allows you to screen for the highest-ranked funds across all of the Lipper categories and time periods.
It's important to remember that past results from mutual fund investments may not indicate the future returns from a particular fund. The Lipper rankings are tools you can use to help select funds that have produced superior historical returns. You should be aware of the investment objectives of the funds you select for your own investment portfolio. The two factors rated by Lipper that have the most validity for future returns are fund expenses and tax efficiency. High expenses and taxes have a direct effect on your total investment returns and are factors under your control when you select funds.
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