Analyzing Mutual Fund Risk

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Many investors have discovered that mutual funds are not the risk free investment they believed they were in recent years. Some people have even seen a large percentage of their retirement savings disappear because of mutual fund losses. These losses could have been avoided if those individuals understood mutual fund risk and diversified their portfolios to compensate for it.

 

Assessing fund risk is fairly easy if you understand what mutual funds are and how they work. Your first step in such assessment should be to research funds and learn about their background and history. Once you understand the basics there are some other factors you need to research to learn what the real risk is.

 

Understand the Fund’s Strategy and How It Should Work

Every mutual fund has a strategy that is supposed to make its investors money. An index fund is supposed to diversify risks and allow shareholders to profit from an entire market or industry. Foreign funds are supposed to help you diversify your investments in more than one country and growth funds are supposed to increase your investment.

 

Read the prospectus to see what the strategy is and if possible examine the fund’s past performance to see if it is achieving those goals. Find similar funds and compare your fund’s performance to them. Look to see if it is performing as well as other funds and what kind of losses those funds experience. That can sometimes predict what your fund will do. You should be able to track the past performance of funds using tools using Yahoo and Google Finance.

Determine what’s In the Fund

The risks taken by a mutual fund is usually determined by what it invests in. Read the fund prospectus and see what securities and equities it is investing in. Then do some research on those products to see how well they perform. You should be able to locate individual stocks through Google Finance and research them. Try to avoid funds that invest in very volatile regions or industries. These can produce much larger losses than more stable investments.

 

Background Research can Reveal Risks

Research industries and markets that a fund is investing in and learn past performance. You should also look for outside factors that add risks such as commodities prices. Compare what you discover to the claims that the funds managers are making.

 

It would also be a good idea to do research on any foreign country a fund is investing in. See if you can learn something about the nation’s politics, history and culture. There could be risks you were not aware of us such as a history of government seizure of private assets.

 

Find out who is Running the Fund

The performance of a mutual fund ultimately depends upon its management. Therefore you should try to find out as much as you can about the management. In particular you should learn their past track record and the performance of their investments. Try to determine if their past performance lives up to their claims. You can often learn this by running searches on fund managers if you can learn their names.

 

Always be leery of a fund that undergoes frequent changes of management. This can be a sign of volatility or other problems. Also beware of fund managers that make exaggerated or unrealistic claims.