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Morningstar Risk Rating


The Morningstar Risk Rating is a measure developed by Morningstar Inc., a reputable financial services firm, to help evaluate the riskiness of mutual funds and Exchange-Traded Funds (ETFs). It compares a predicted risk measure to the actual returns of the fund over a specific period. The rating ranges from 1 to 5, with 1 representing funds with the lowest risk and 5 indicating the highest risk.


‘Morningstar Risk Rating’ in phonetics would be: /ˈmɔːrnɪŋstɑːr rɪsk ˈreɪtɪŋ/

Key Takeaways


  1. Measure of Uncertainty: The Morningstar Risk Rating is a measure of the volatility or uncertainty in a mutual fund, ETF or other investment’s returns compared to other investments in the same category. It helps investors understand the potential downside risk of an investment.
  2. Five Levels of Risk: Morningstar assigns each fund a rating between one and five, with one being the lowest risk and five the highest. The ratings are based on a fund’s monthly returns over a three-year period. Investors can use this rating to compare the risk level of different funds in the same category.
  3. Historic Indicator: The Morningstar Risk Rating is only an indication of historic risk and not a predictor of future risk. Therefore, while it provides valuable insight, it should not be the sole basis of investment decisions as market conditions and fund specifics continuously evolve.



The Morningstar Risk Rating is an important instrument in the financial world because it offers a measure of a mutual fund’s or ETF’s level of risk in relation to other funds in the same category over a designated timeframe. This rating doesn’t just reflect the volatility or price fluctuations but rather seeks to capture the amount of losses. By doing so, it can be instrumental in helping prospective investors understand and anticipate whether certain funds might potentially cause large unexpected losses. This awareness can guide them in making informed decisions, aligning their investment choices with their risk tolerance, and, ultimately, creating a balanced, diversified portfolio.


The Morningstar Risk Rating is a measure used in the finance and investment industry as an indicator of an investment fund’s risk. It serves as an essential tool for investors aiming to make informed decisions about their level of investment in a specific fund. The rating estimates the amount of monetary loss an investor may experience if the market presents stressful conditions. In this way, it helps investors understand the risk compared to potential returns on various funds, providing key insights to prevent unpredicted financial losses.Additionally, the Morningstar Risk Rating adds value to the decision-making process by offering a comparison of similar funds. It allows investors to identify funds with similar return characteristics and compare their risk components. Essentially, having this in-depth understanding of the fund’s risk and its comparison with similar ones equips investors to select funds more aligned with their risk tolerance and investment objectives, ultimately enhancing their portfolio management strategies.


The Morningstar Risk Rating is a measure that quantifies the variations in a mutual fund or ETF’s monthly returns, with a focus on downward variations and a higher rating for lower risk. Here are three real-world examples:1. Vanguard 500 Index Fund: Eventually, this large blend fund may carry a below-average risk rating from Morningstar due to its diversified holdings in top 500 U.S. companies, reducing market risk.2. Franklin Biotechnology Discovery Fund: This sector-focused fund could have a high Morningstar risk rating due to its concentration in the often volatile biotechnology industry. 3. PIMCO Investment Grade Corporate Bond Fund: This fund invests primarily in high-quality corporate bonds and could possibly have a low or average Morningstar risk rating, reflecting the lower risk associated with investment-grade corporate securities compared to equities or lower-rated bonds. Remember, Morningstar ratings serve as a helpful tool to identify and compare potential risk levels across different funds, but they should not be the sole basis of investment decisions. It’s important to consider other factors, such as financial targets, time horizon, and risk tolerance.

Frequently Asked Questions(FAQ)

What is Morningstar Risk Rating?

Morningstar Risk Rating is a proprietary rating system developed by Morningstar, Inc. for evaluating the historical risk-adjusted returns of mutual funds and ETFs.

How is Morningstar Risk Rating calculated?

This rating is calculated based on the fund’s monthly excess returns in comparison to a risk-free rates, like the return on treasury bills, considering both the volatility and the performance.

What does the Morningstar Risk Rating indicate?

The rating provides a measure of a fund’s variation in monthly returns, with an emphasis on downside variations. It’s used to help potential investors understand the risk-to-reward scenario of a particular fund.

How often is the Morningstar Risk Rating updated?

The Morningstar Risk Rating is updated every month, considering the performance of the fund over the past three, five, and ten years.

How are the risk ratings ranked?

The Morningstar Risk ratings are classified on a scale of Low to High. The top 10% of funds in a category are described as Low risk, next 22.5% as Below Average , middle 35% as Average , next 22.5% as Above Average , and the bottom 10% as High.

Does a higher Morningstar Risk Rating mean better performance?

Not necessarily. A higher risk rating indicates greater variability in the fund’s historical returns. While it may give higher returns, it also comes with a higher risk of loss.

Are all types of funds rated by Morningstar?

Morningstar rates only those funds that have a performance history of at least three years.

Can I choose a fund based solely on the Morningstar Risk Rating?

While the risk rating is a useful tool for assessing a fund’s historical risk, it should not be the sole deciding factor. Fund selection should also involve understanding the investment objectives, portfolio management, costs, and risk tolerance.

Related Finance Terms

  • Morningstar Return Rating: This is another rating system by Morningstar which evaluates a security’s historical returns.
  • Mutual Funds: These are investment vehicles often rated by the Morningstar Risk Rating system, which provides insights on their risk-adjusted performance.
  • Risk-Adjusted Return: This is a concept used in finance to determine how much risk is associated with investment returns, a key factor in Morningstar Risk Ratings.
  • Investment Risk: This term refers to the potential loss in an investment, a key factor considered by the Morningstar Risk Rating system.
  • Portfolio Volatility: This refers to the rate at which the price of a security increases or decreases for a set of returns, an element that the Morningstar Risk Rating considers.

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