Companies like Standard and Poor's, TheStreet Ratings, Lipper and others offer ratings on municipal bond funds. These ratings can help you choose which funds are the best places to invest your money. While the rating systems vary, they typically look at a fund's performance and at the quality of the bonds they hold. At the same time, the bonds inside the funds are also rated using a separate system.
Companies typically use simple indicators for their rating -- such as stars or numbers -- to indicate the relative strength of a fund, masking the more complicated system that makes up the actual rating. While some rating systems are primarily based on a fund's past performance, others are more heavily weighted toward the perceived quality of the funds' holdings. Because the different companies use different systems, it's possible for a fund to be highly rated by one researcher as a "strong buy" while another considers it a middling performer and gives it a "hold" rating.
Ratings are a tool to help you make good investment decisions. However, they can also bring a bit of confusion to investors, since the ratings companies don't always agree. Understanding what goes into each rating can help you find a research company whose philosophy matches yours. In addition, doing your own research on a fund can also help you make your own decision that is informed by the rating -- the rating becomes one small piece of the picture -- instead of being totally dependent on the rating. Municipal bond funds frequently provide information on their past performance, the way that they are managed, and what bonds they hold, and this information can serve as the backbone of your personal research efforts.
Many financial or news magazines publish their own fund rankings. Some simply repurpose existing research, such as by using one research firm's top funds for their own top 50 list. Others, however, summarize data from major research firms to create an overall ranking that blends the different approaches of all the firms into a single score.
Individual Bond Ratings
The bonds that make up a municipal bond fund are also rated individually. Companies like Standard & Poor's, Moody's and Fitch all look at the strength of the government agency issuing the bond and issue a letter grade to indicate the bond's safety. An "investment grade" bond is anything rated BBB or higher by Standard & Poor's and Fitch or Baa or better by Moody's. The highest rating is AAA or, for Moody's Aaa, and indicates the bond with the least chance of default. Generally, higher-rated bonds offer lower returns than lower-rated bonds, but they are also less likely to default.
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