Identifying Conservative Mutual Funds
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Identifying Conservative Mutual Funds
Any mutual fund whose investment objective is to conserve principal is considered a conservative fund. Certain funds, however, focus exclusively on historically conservative investments.
Things To Know
- Money market mutual funds have the lowest volatility.
- Conservative stock funds focus on well-established companies.
Money market funds
Money market mutual funds have the lowest volatility of all funds, and are considered the most conservative of mutual funds although they are not insured by the FDIC (Federal Deposit Insurance Corporation) or NCUSIF (National Credit Union Share Insurance Fund), as are bank and credit union accounts. Money market mutual funds invest in short-term instruments of debt such as US Treasury bills or short-term loans to major corporations.
Bond funds
A conservative bond fund invests primarily in low-default-risk bonds, such as mortgage bonds, investment-grade corporate bonds, and those issued by the US Treasury.
Balanced funds
A balanced fund invests in a combination of stocks, bonds, and money markets. The diversity of a balanced fund makes it more conservative than an all-stock fund. A balanced mutual fund maintains the growth potential of stocks (usually blue chip), while the volatility is buffered by the more stable values and higher income of bonds (usually of high credit rating) and money market instruments. As you can see, this type of fund has balance between growth and income as an objective. It is more aggressive than an all-short-term government bond fund, yet conservative compared to an all-stock fund.
Stock funds
Conservative stock funds focus on well-established companies with stocks that pay above-average dividend yields. Steady dividends provide a good indicator of a company’s financial health and can sometimes offset stock price losses. Conservative stock funds may also buy undervalued stocks at low prices, thereby lowering a stock’s downside risk and increasing its upside potential.
How to find out more
To find out how conservative a mutual fund is, you can examine its prospectus. A prospectus is a comprehensive informational document that explains the terms and objectives of the fund. The fund objectives are usually found within the first few pages of the prospectus under the heading "Goals" or "Objectives." You can also see how funds are rated by services such as Morningstar or Value Line regarding their investment style and risk.
