Unfortunately many people have learned about mutual fund risk the hard way in the past few years. They assumed mutual funds were safe investments only to wake up one day and find that they had lost all or most of their money.
With this in mind many of us are wondering who to calculate mutual fund risk? There is no way to accurately predict the performance of a fund but there are methods of estimating the amount of risk involved. You should always do the risk calculation yourself because people that sell mutual funds often will not.
Read the Prospectus
Whenever you think of purchasing a mutual fund you should read the prospectus over carefully. The prospectus is a document that tells you all about the fund: it lists the management, tells you what the fund invests, tells you what fees it charges in and even lists its performance. Anybody selling a mutual fund is required to give you the prospectus by law. These documents are also available free online from most of the major funds. Yahoo Finance's Prospectus Finder can help you locate the prospectus for almost any fund.
Closely Examine what the Fund Invests In
A mutual fund is usually based upon a strategy or formula for investing that is designed to maximize gains and reduce risks. These formulas are not necessarily scientific and in many cases are based upon educated guess work or fund managers' theories.
Take a close look at what the fund is investing in such as stocks, bonds, commodities etc. If a large percentage of the funds are invested in a particular stock, trying running a Google or Yahoo Finance search on that security and see what its performance is. If you find the fund has invested in a lot of volatile or underperforming stocks it might be a good idea to look elsewhere.
Determine the Level of Volatility
Volatility means that investments gain and lose a lot of value quickly. If you are investing for the long term it can be bad because there are added costs to volatility. More volatile funds can make a big profit quickly but they can lose a lot of money quickly. It usually is not a good idea to put retirement savings in funds that are very volatile.
The way to determine if a fund is volatile is to take a look at its performance. There are a number of online tools that can help do this including Yahoo Finance's Mutual Fund Center. It is possible to see a fund's real performance here and learn the volatility.
Past Performance is a Good Indicator
A fund's past performance is often a good indicator of how it will do it in the future. If it was volatile in the past or lost a lot of money in recent years there is a strong possibility it will repeat that performance. If you can find similar funds and examine their performance you can also have a good indicator of what the fund might do.
Another interesting strategy is to check out the people that run the fund. The prospectus should list the fund managers and you can often learn about their past performance by running a search on them. Fund managers move from company to company and the media often tracks their moves. You could be able to learn what their strategies are and the results they achieved in the past.
It also pays to look at how stable the management is. One sure sign of volatility or questionable performance at a fund is constantly changing management. The sudden departure of a manager could mean something is wrong. So could a recently hired manager.
You will not be able to calculate or predict all mutual risk but it possible for an average person to learn how to pick a good or reliable fund. There is one surefire way not to learn mutual risk and that is to rely on the people selling the funds for all your information.
Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Single Premium Immediate Annuities, What is an Annuity, and Current Annuity Rates.
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