Course 201: Five Questions to Ask Before Buying a Mutual Fund
How Risky Has It Been?
In this course
1 Introduction
2 How Has It Performed?
3 How Risky Has It Been?
4 What Does It Own?
5 Who Runs It?
6 What Does It Cost?

Of course, the very act of investing involves an element of risk. After all, you're choosing to give your money to a portfolio manager rather than socking it away under the bed or putting it into a savings account at your local bank.

Generally, the greater the return of an investment, the greater the risk—and therefore the greater potential for loss. Investors who take on a lot of risk expect a greater return from their investments, but they don't always get it. Other investors are willing to give up the potential for large gains in return for a more probable return. Consider a fund's volatility in conjunction with the returns it produces. Two funds with equal returns might not be equally attractive investments; one could be far more volatile than the other.

There are a number of ways to measure how volatile a fund is. There are four main risk measurements that appear in mutual fund shareholder reports, in the financial media, and on Morningstar.com. These include standard deviation, beta, Morningstar risk ratings, and Morningstar bear market rankings. It's also helpful to check out a fund's quarterly and annual returns in different market conditions to get a sense for its potential volatility.

Next: What Does It Own? >>


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