Safety Rating of Mutual Funds

Unlike bonds and insurance companies (for which there are ratings agencies), mutual funds are rated in terms of quality and performance rather than security and safety of the fund itself. With respect to individual stocks, however, the Value Line Investment Survey does rate companies--which mutual funds can own--with respect to their safety and timeliness of earnings. The following are important considerations regarding risk to mutual funds, however.

  1. Safety of Principal

    • The technical measure of safety by which other investments are measured is "riskless return," also known as a "cash equivalent" return. The safest security available to judge by is the short-term (three- month) U.S. Treasury Bill.

    Government Treasury Money Market Mutual Funds

    • Some money market mutual funds, such as the Reserve Funds U.S. Treasury Fund (symbol RUTXX), are composed entirely of Treasuries and have the full faith and credit of the U.S. Treasury underlying its portfolio. Their returns are understandably minuscule but their safety is superior.

    Fund Evaluation Companies

    • A few reputable and noteworthy mutual fund evaluation companies publish data pertaining to mutual fund performance, expenses, volatility and quality, among other data. Morningstar and Kiplinger are two examples.

    Risk-Reward Spectrum

    • It is important to understand that as you move away from the low return of Treasuries toward the higher return of stocks, volatility increases. These types of investments are not safe for some with short time-frames. Here again, Morningstar has a 5-star system to evaluate the overall quality of all funds.

    A Word About Objectives

    • "Safety of Principal" is an objective, and mutual funds are available to fit that need. If time frames and objectives permit, high quality mutual funds with capital appreciation and even aggressive growth can be elected.

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