Background: Throughout digitalization, the rating system has been integrated across investment platforms, banks and more. Among the vast amount of information available to analyze mutual funds, the Morningstar rating system provides a shortcut for investors seeking a quick evaluation of an investment.

Purpose: Conduct a study about if changes in the Morningstar rating for Swedish mutual funds cause a reaction among investors. Gaining an understanding regarding the significance of the change in a rating for investors’ reaction. Additionally, the study will observe returns prior to and post-rating changes to see if an action based on a rating change would have been beneficial for an investor.

Method: A quantitative approach was utilized to examine the impact “Star Rating” changes have on mutual funds. The study obtained fund flow, ratings and returns on a monthly basis for Swedish mutual funds from 2017 to February of 2023. By performing a Benchmark regression and a Single-Index model, Abnormal fund flow and Excess returns is obtained for each fund on a monthly basis. Given the nature of the phenomena, the study divides the data into ten different events containing isolated rating changes over an eight-month period. In which both Abnormal flow and Excess returns are compared prior to and post experiencing rating change by the use of a paired T-test. 

Conclusion: The general interpretations of the results indicate that investors seem to be responsive to a rating change. This is expressed in the fund flow, where funds with a higher rating tend to receive higher fund flows after receiving recent upgrades. As for the downgrades, the fund flows do not show the same significant response. As it appears the excess returns are not significantly different following rating upgrades nor rating downgrades, it appears that investors who act by opening or selling a position when an upgrade or downgrade occurs can not expect any significant difference. This study suggests that there is some evidence of herd behavior and heuristics for investors in the Swedish mutual fund market.