The Morningstar Rating for Funds, often called the Star Rating, is a data-driven rating that measures how well a fund has performed compared to similar funds.
To calculate the Star Rating, Morningstar groups funds into categories based on the kinds of investments they hold - allowing an apples-to-apples comparison.
Funds with at least a 3-year record will receive a rating of 1 to 5 stars.
All else equal, funds that have beaten most of their peers will receive 4 and 5 stars, while funds that have underperformed will receive 1 or 2 stars.
The rating also considers how much risk a fund has taken to achieve its return. A fund that has been more volatile will generally receive a lower rating than a steadier fund that has achieved the same return.
Because the Star rating is only based on past performance it should not be the sole factor in making an investment decision.
The Morningstar Rating for Funds is a good first step for investors seeking a new fund.