If you’ve ever scrolled through investment research or fund reviews, you’ve probably seen the Morningstar Risk Rating—a familiar set of icons ranging from ‘Low’ to ‘High’. But in 2025, with heightened market swings and regulatory updates, understanding what this rating really means is more critical than ever for Australian investors. So, how does Morningstar’s Risk Rating work, and how should you use it to shape your portfolio strategy?
What Is the Morningstar Risk Rating?
The Morningstar Risk Rating is a tool that helps investors assess the historical volatility of a managed fund or ETF relative to similar investments. It’s designed to put a spotlight on how much a fund’s returns have fluctuated, making it easier to compare risk levels across categories.
- Five-point scale: Funds are rated from ‘Low’ to ‘High’ risk, with ‘Average’ as the middle ground.
- Peer-relative: Ratings compare funds within the same Morningstar category, so an ‘Above Average’ risk rating means more volatility than most peers.
- Objective calculation: Morningstar uses a proprietary formula based on downside deviation (not just standard deviation), focusing on negative returns versus a risk-free benchmark.
In 2025, Morningstar has fine-tuned its risk model for Australian-domiciled funds to account for changes in global market correlations and the impact of local economic shocks, such as the ongoing effects of inflationary policy and housing market adjustments.
How Is the Risk Rating Calculated?
Morningstar’s risk methodology isn’t static. As of this year, the company has updated its calculation to better reflect the real-world experience of Australian investors, including:
- Downside deviation over five years: The rating looks at monthly returns over a rolling five-year period, giving more weight to losses than gains.
- Risk-free benchmark update: With the RBA’s cash rate now sitting at 4.1% in 2025, Morningstar’s benchmarks have shifted, making it tougher for riskier funds to score well unless they deliver strong returns.
- Peer group context: For example, a high-growth Australian equities fund isn’t compared to a conservative bond fund—only to other Australian equity funds.
Imagine two global share funds: Fund A and Fund B. If Fund A’s returns dip sharply during market downturns, while Fund B weathers the storm with smaller losses, Fund A will be rated ‘Above Average’ or ‘High’ risk, and Fund B might earn an ‘Average’ or ‘Below Average’ risk rating—even if both deliver similar long-term returns.
Why the Morningstar Risk Rating Matters in 2025
This year, Australian investors face a unique mix of market uncertainty and opportunity. The ASX has seen larger-than-usual swings, driven by global tech volatility and domestic property market shifts. Meanwhile, APRA and ASIC have placed a sharper focus on transparency in managed fund reporting, making risk ratings more visible and consequential.
- Portfolio construction: Use the Risk Rating to balance your exposure—pair higher-risk funds with steadier options to match your goals and risk appetite.
- Regulatory guidance: New ASIC guidance released in February 2025 encourages fund managers to prominently display risk ratings in their PDS documents, giving investors more clarity at the point of decision.
- Retirement planning: With market volatility affecting superannuation outcomes, retirees and pre-retirees can use the Risk Rating to avoid overexposure to high-risk funds, especially as preservation becomes a top priority.
Remember, the Risk Rating is a historical measure—it doesn’t predict future swings, but it’s an essential reality check before chasing high-flying returns.
Limitations and Smart Usage
While the Morningstar Risk Rating is a valuable tool, it’s not a crystal ball. Here’s how to use it wisely:
- Combine with other metrics: Always consider the Risk Rating alongside the Morningstar Return Rating, fees, investment style, and manager track record.
- Understand your objectives: A ‘High’ risk fund isn’t bad if you’re young, investing for growth, and can stomach volatility. For income-focused investors, a ‘Low’ or ‘Average’ risk rating may be preferable.
- Watch for recent changes: If a fund has recently changed managers or strategy, the past risk profile may not reflect future performance.
For instance, in 2025, several major Australian super funds have launched new diversified options aimed at reducing volatility. These changes mean their historical Risk Ratings may lag behind their new, more conservative strategies—something to watch for in the next round of Morningstar updates.
