Are All Gold Medal Mutual Funds Equally Efficient?

Abstract

Mutual fund ratings are extremely popular among mutual fund investors, with over 8,000 mutual funds currently available to them and a huge increase in privately managed retirement accounts. Morningstar introduced the star-rating system to mutual funds, grading them on a range of one to five stars, with one star being the lowest and five stars being the highest. Because of its simplicity and resemblance to the ratings of so many other products we buy, the star-rating system has become an intrinsic element of mutual fund jargon. Morningstar experts award 5-star funds a gold, silver, or bronze medal ranking based on their instinctual analysis. This research investigates whether all gold-medal winning five-star mutual funds are equally efficient in terms of risk-adjusted performance. When total return, adjusted expense ratio, standard deviation, tax cost ratio, Sharpe ratio, and fund alpha are all considered, we discovered that not all “gold medal” mutual funds are equally efficient. Investors should take care even among “gold medal” funds since some are more efficient than others.

Citation

Malhotra, D.K., Malhotra, R. and Nydick, R.L. (2022), "Are All Gold Medal Mutual Funds Equally Efficient?", Lawrence, K.D. and Pai, D.R. (Ed.) Applications of Management Science (Applications of Management Science, Vol. 21), Emerald Publishing Limited, Leeds, pp. 13-26. https://doi.org/10.1108/S0276-897620220000021002