Many Investors give a lot of importance to 5-star ratings of mutual funds schemes while selecting a scheme. But is it a foolproof method to invest in mutual funds? Here are a few key points I would like to bring to mutual fund investors.
One, 5-star ratings are usually based on past performance. That means, it does not guarantee the scheme would continue to perform well in future. In fact, you will notice that some of these 5-star schemes may not get the same rating six months or year later.
Two, these ratings are based on the category of the scheme. So, a scheme can be 5-star rated, but the category itself may not be performing well. For example, you may choose a sector scheme which is 5-star rated, but it's performance may be worse than a 3- or 4-star diversified equity scheme.