At their core, mutual funds should be lower-risk investments. The aim of many mutual funds is to provide broad-based exposure to a particular asset class; stocks, bonds, etc. With that diversity, at least in theory, should come a lower risk profile for investors.
“All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change,” according to the Securities and Exchange Commission (SEC). “A fund’s past performance is not as important as you might think because past performance does not predict future returns. But past performance can tell you how volatile or stable a fund has been over a period of time. The more volatile the fund, the higher the investment risk.”
Indeed, an array of low-risk mutual funds spanning multiple asset classes are currently available to investors. Still, even some low-risk mutual funds are not entirely free of risk. Even low risk mutual funds with fixed income exposure have some risk.
“Bond mutual funds — like all mutual funds — involve investment risk, including the possible loss of principal. A fundamental principle of investing known as the risk/reward tradeoff means that when you make an informed decision to assume some risk, you also create the opportunity for reward. Investors should be aware of the risks and potential for losses associated with bond mutual fund investing,” according to the Investment Company Institute (ICI).
Here are a few low-risk mutual funds for conservative investors to consider.
Fidelity Income Conservative Bond Fund (FCONX)
Expense Ratio: 0.35% per year, or $35 on a $10,000 investment.
The Fidelity Income Conservative Bond Fund (MUTF:FCONX), which requires a minimum investment of $2,500, epitomizes “low-risk mutual fund,” particularly at a time when interest rates are rising. Short-term bond funds are among this year’s most popular fixed income funds due to the lower duration risk profile offered by short-dated bonds.
This low-risk mutual fund has a duration of just 0.13 years and a weighted average maturity of 0.73 years. Additionally, credit risk is benign with this Fidelity fund because its holdings are comprised primarily of sovereign debt. Over 52% of FCONX’s holdings are rated AA or A. About 34.6% of the fund’s holdings are issued by foreign issuers, but those are mainly large, highly rated developed markets.
FCONX has a 30-day SEC yield of 2.12% and a three-star Morningstar rating.
Vanguard Inflation-Protected Securities Fund (VIPSX)
Expense Ratio: 0.2%
When looking for low-risk mutual funds, the Vanguard Inflation-Protected Securities Fund (MUTF:VIPSX) highlighted here is the investor class of this popular product and requires a minimum investment of $3,000.
Treasury inflation-protected securities (TIPS), the bonds held by this Vanguard fund, are low-risk bonds. Reduced risk in the fixed income space usually means lower yields, and that is true of TIPS. VIPSX has an average duration of 7.6 years.
Income on this low-risk mutual fund “can fluctuate more in this fund because payments depend on inflation changes. Investors with a long-term time horizon may wish to consider this fund as a complement to an already diversified fixed income portfolio,” according to Vanguard.
Vanguard Equity Income Fund (VEIPX)
Expense Ratio: 0.26%
Over long holding periods, dividend stocks can reduce a portfolio’s risk profile and there are plenty of dividend funds that can be classified as low risk mutual funds, include the Vanguard Equity Income Fund (MUTF:VEIPX). VEIPX is the investor share class of this popular Vanguard offering and requires a minimum investment of $3,000.
This low-risk mutual fund holds 186 stocks with a median market value of $110.3 billion. Financial services and technology stocks combine for over 31% of VEIPX’s roster while the healthcare and industrial sectors combine for 26.7%.
VEIPX does not explicitly have a dividend increase streak requirement, but this fund is home to some stocks with lengthy histories of rising payouts. Several of VEIPX’s top 10 holdings have dividend increase streaks that can be measured in decades.
American Century Mid-Cap Value Fund (ACLAX)
Expense Ratio: 1.23%
Some words of advice regarding the American Century Mid-Cap Value Fund (MUTF:ACLAX). As the above expense ratio indicates, this is not a cheap fund and that status is further cemented by a 5.75% sales load, meaning investors considering this low-risk mutual fund should be in it for the long-term.
On to better news, mid-caps have a lengthy history of outperforming large-caps while doing so with less volatility than small-cap stocks. In fact, ACLAX’s five-year standard deviation is less than that of the S&P 500, confirming that this is, in fact, a low-risk mutual fund.
This fund is a focused fund as it has 96 holdings pulled from a benchmark with nearly 600 components. The financial services and industrial sectors combine for over 37% of ACLAX’s weight. None of the fund’s holdings exceeded a weight of 2.92% as of the end of the second quarter.
Vanguard Total Stock Market Index Fund (VTSAX)
Expense Ratio: 0.04%
The Vanguard Total Stock Market Index Fund (MUTF:VTSAX) is a passively managed index fund, not an active mutual fund. In fund world, VTSAX is one of the true giants among equity products. As of the end of May, across various share classes, the Vanguard Total Stock Market Index Fund, had almost $700 billion in assets under management.
VTSAX can be considered a low-risk mutual fund among equity funds due in part to its massive roster. This Vanguard fund is home to over 3,600 stocks, giving it a lineup that is more than seven times larger than the S&P 500.
Diversification helps minimize risk with total stock market funds and VTSAX keeps with that tradition as its top 10 holdings represent less than 18% of the portfolio. VTSAX is the Admiral share class of this fund and requires a minimum $10,000 investment, but with that comes an annual fee that makes this fund cheaper than 96% of competing strategies.
Fidelity Advisor Strategic Income Fund (FSTAX)
Expense Ratio: 1%
The Fidelity Advisor Strategic Income Fund (MUTF:FSTAX) is a multi-sector bond fund, offering investors exposure to multiple corners of the fixed income universe.
“The fund uses a neutral mix of approximately 45% high yield, 25% U.S. Government and investment-grade, 15% emerging markets, and 15% foreign developed markets. Engaging in transactions that have a leveraging effect on the fund,” according to Fidelity.
FSTAX has a duration of 4.28 years. The fund’s managers can adjust credit and interest rate risk as market conditions. A turnover rate of 123% for 2017 indicates FSTAX’s management team has been active in mitigating the fund’s risk profile amid myriad challenges for the bond market.
Invesco Global Low Volatility Equity Yield Fund (GTNDX)
Expense Ratio: 1.65%
The Invesco Global Low Volatility Equity Yield Fund(MUTF:GTNDX)can be considered another low risk mutual fund tracking the mid-cap space as the as weighted average market value of its holdings is $7.41 billion. This low risk mutual fund also sports a three-year standard deviation of just 9.29%, a point sure to attract conservative investors.
Currently, GTNDX is underweight technology stocks, which dragged on the fund’s first-quarter results. However, the fund’s consumer discretionary and energy exposures, among others, have kept performance mostly solid this year.
This low-risk mutual fund “has dual objectives of providing income and long-term growth of capital. In addition to these objectives, the fund targets a level of total volatility that is less than that of its capitalization-weighted market index,” according to the issuer.
Todd Shriber does not own any of the aforementioned securities.