Video Blog: My Broker Said My Mutual Fund Was Rated Triple A or Five Star: What Does That Mean?

Credit ratings are used as indicators of a bond’s creditworthiness by rating organizations, who analyze the financial condition of a bond issuer. There are three major rating organizations in the United States that provide such ratings: Moody’s Investors Service, Standard & Poor’s Corporation, and Fitch Ratings.

Using labels such as “Triple-A” is meant to convey a high likelihood of a bond issuer meeting its financial commitments, such as paying interest and principal on time.  While a high rating may seem to be very reliable, it only represents the current status and does not reflect how any future developments to the issuer may affect the bond.

As Attorney Jeffrey P. Coleman also explains in the video below, extreme care should be taken when evaluating any bond’s creditworthiness; as some brokers may mislead investors into believing that a bond’s credit quality is better than it truly is.

Video Transcript:

There are a number of different organizations (like Morningstar) that provide rating services for mutual funds, but what you need to understand is that there are different classes within those mutual funds. If you’re a very secure-oriented/conservative investor, you might not want to be purchasing a triple-A rated junk bond fund because that is being rated very highly, but only within the class of risky speculative junk bond funds. So finding out the rating is just part of the answer, you need to know the class of funds that are being rated.

Relevant Links:

An informative directory on where to start when first learning about bonds by the Financial Industry Regulatory Authority:

A breakdown of how to evaluate bond risk (also by FINRA):
FINRA – Understanding Bond-Risk

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