Mutual Fund Questions: How Has It Performed? How Risky Has It Been?
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Mutual Fund Questions: How Has It Performed? How Risky Has It Been?
How has it performed?
Many would say that a fund that produced returns of 22% per year for the past five years has a better manager than a fund that returned 20% per year over the same period. That’s sometimes the case but not always. The fund that gained 20% may have beaten competing funds that follow the same investment style by six percentage points, while the 22% gainer may have lagged its competitors by a mile.
Things To Know
- Compare the fund’s returns to appropriate benchmarks.
- Consider a fund’s volatility in conjunction with the returns it produces.
To really know how well a fund is doing, put a fund’s returns into context. Compare the fund’s returns to appropriate benchmarks—to indexes and to other funds that invest in the same types of securities.
How risky has it been?
Of course, the very act of investing involves an element of risk. After all, you’re choosing to give your money to a portfolio manager rather than socking it away under the bed or putting it into a savings account at your local bank.
Generally, the greater the return of an investment, the greater the risk—and therefore the greater potential for loss. Investors who take on a lot of risk expect a greater return from their investments, but they don’t always get it. Other investors are willing to give up the potential for large gains in return for a more probable return. Consider a fund’s volatility in conjunction with the returns it produces. Two funds with equal returns might not be equally attractive investments; one could be far more volatile than the other.
There are a number of ways to measure how volatile a fund is. There are several main risk measurements that appear in mutual fund shareholder reports, in the financial media, and on investment research Websites like Morningstar.com. These include standard deviation, beta, various other risk ratings, and even bear market rankings. It’s also helpful to check out a fund’s quarterly and annual returns in different market conditions to get a sense for its potential volatility.
