Fine Points of Fund Selection
How to find the exact shade of fund you want.
Morningstar's mutual fund categories are useful because they allow savvy fund shoppers to make relevant comparisons among offerings with similar attributes. After all, there's not much to be learned from comparing the returns of a fund that specializes in large-cap growth stocks with one that homes in on cheap small caps. Though both types of funds can certainly play important roles in a well-diversified portfolio, they serve different purposes and their managers pick stocks from very different universes. Comparing funds within a category, on the other hand, helps to ensure that you're comparing apples to apples.
Although the categories can greatly expedite the process of picking from among the best funds in a peer group, they don't tell the whole story. The majority of domestic-equity funds, for example, are assigned to one of just nine peer groups, and while that's more useful than lumping all stock funds together, it still paints a fairly broad picture. Not all mid-blend funds are created equal, for instance. Some tilt toward the value side of the style box, some lean toward growth. Market cap is another potential area of divergence. "Mid-cap" covers a broad swath of the market, and during 2003, for example, those funds that have gravitated toward the smaller end of the mid-cap range have, on average, fared better than their bigger brethren.
Morningstar Fund Analyst Reports are your best bet for getting a tighter grip on the way a manager has positioned her fund, but the Premium Fund Selector can help in that respect, too.
Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.