How to Asses the Risk of a Mutual Fund
Assessing the risk of a mutual fund can be tricky, because a mutual fund's risk depends on what the investment portfolio includes. Investments heavy in stock are typically risky, while bonds carry less risk. Understanding what investments are included in your mutual fund can assist in making future investment choices.
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Instructions
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Examine a mutual fund's investment portfolio. If you want to understand the risk of a mutual fund, you have to take a look at what's included in the portfolio. If you discover the fund is loaded with stocks, the mutual fund is more risky. However, if the fund is heavy in bonds, it's a less risky investment.
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Determine if the mutual fund is attractive to buyers. A mutual fund that is attractive to buyers will be less risky because it's more liquid. Ask your investment manager to give you a snap shot of how easily your mutual fund will sell in normal market conditions.
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Uncover information about bond issuers. If your mutual fund is heavy in bonds, you can determine risk by understanding who the bond issuer is. If they have a history of defaulting on bond payments, consider the investment to be high risk.
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Evaulate foreign investments. If you own a mutual fund that is heavily invested in foreign markets, it may be high risk or low risk. It will be high risk if the country is having economic stability issues, and low risk if the economy is sound.
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Determine the currency risk of a mutual fund. If you have foreign investments and there is a currency decline, your investment may be high risk. Keep up on the exchange rates to determine if your mutual fund is at risk.
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Tips & Warnings
Consider seeking professional advice. Although many individuals manage their own investments, it can be reassuring to seek professional advice. This can safeguard your investments from potential market risks.
Look at a mutual fund's returns. A risky investment will have drastic changes from year to year on returns.
