Are Mutual Funds Risky? Analysis of the Top 10 Mutual Funds

Every investment in the stock market caries an element of risk, we can lower this risk through diversification, simple investments, and extensive research… A mutual fund offers 2 of those things.

It is a poor assumption to say that mutual funds are risk free investments. With the variety of funds on the market, you really need to do your research to find one that not only suits your risk tolerance, but can also return a desired profit.

Mutual funds are considered a low risk investment on the stock market. This is because the diverse nature of a fund gives a broad overview of the wider market. This means in a growing economy, a mutual fund will match the market growth… And vice versa for a declining economy.

The risk of a mutual fund depends on what they invest in, the potentially higher gains often offset the higher risk. Mutual funds generally invest in instruments such as:

  • Bonds
  • Stocks
  • Currency
  • Commodities
  • And Cash

As you can imagine, these investment vehicles hold positives and negatives when it comes to risk.

What is a Mutual Fund? And Why are they so Popular?

A mutual fund is a pool of money collected from the general public, who want to become investors in the equities market. They give their savings or a monthly amount to a mutual fund, and then they sit back and watch as the fund manager works their magic.

They are a passive way of investing in the stock market, once you have deposited your money, you don’t need to do anything except watch the fund value. (Which doesn’t change massively).

The main way you make money from a mutual fund is through dividend payments (usually called disbursements). This can be either a monthly or quarterly payment directly to you, or reinvested into the fund. Over time, you can also gain from the fund value increasing, hence your investment is worth more than before.

Mutual funds are one of the most popular way people invest their savings, 44% of households in the United States invest in mutual funds… That’s nearly 90 million people.

The mutual fund industry as of 2020, manages $12.2 Trillion, and it’s only going up with more and more people looking to mutual funds to save for retirement. The average age of a person invested in a mutual fund in 2009 was 50 years old… In 2020, the average age was closer to 40.

Mutual funds are so popular because they offer higher returns than regular savings accounts, so people saving for retirement (alongside any retirement accounts), can boost their wealth quicker.

Risky Mutual Funds 900x900

6 Risk Factors you Need to be Aware of

These are just common risks that investors face, some are more common than others, but keep them in the back of your mind just incase.

Type of RiskInvestment AffectedHow the Fund could Lose Money
Credit RiskFixed Income Securities (Bonds)If the bond issuer can no longer pay back the bond holder, the investment will become worthless
Liquidity RiskAll InvestmentsThe fund can not sell an investment that is declining in value, because no one will want it
Market RiskAll InvestmentsThe value of assets could decline because of unavoidable circumstances that affect the entire market
Interest Rate RiskFixed Income Securities (Bonds)The value of bonds is dependant on interest rates, if interest rates rise, bond value falls
Country RiskForeign InvestmentsPolitical changes in foreign countries, or instability in the country’s economy could lead to unforeseen falls in value
Currency RiskInvestments denominated in other currenciesThe value of currency also affects how much an investment is worth. If you work in $USD, if another currency declines against $USD, the investment will lose value

One, or many of these factors could affect the overall risk of you mutual fund investment.

Risks you can Control

From all of these factors, there is probably only 2 you can control as an outsider looking into the fund… Country Risk and Currency Risk. You can easily control these risks by only investing in funds that focus on investments in your home country.

Foreign investments can become very risky as different countries have different policies for publicly traded companies. I would stay away from them unless you have a fundamental understanding of the foreign countries legislation.

Currency is also something we cannot control, banks move currency in such high volumes that the value of one currency can decline or rise up to 10% in one day. No one knows what the banks are going to do next, so to avoid a surprise, stick to your home currency.

Risks you can’t Control

As for the other risk factors… We can prepare ourselves and mitigate as much risk as possible through research, but it is ultimately something we cannot control.

As an investor in a mutual fund, you have no say in what the fund invests in, you’re just along for the ride. So market, liquidity and credit risks are down to how speculative the fund manager wants to be.

What makes Mutual Funds so Safe?

The main thing that makes a mutual safe is the diversity. The fund will hold a multitude of assets across many industries and possibly countries, this makes it ‘storm worthy’. In the event of an industry-wide, or nationwide market crash, mutual funds will most likely suffer less than individual stocks or ETF’s.

You can plan your own portfolio of stocks and bonds, but the people running these mutual funds know what they’re doing. You might be successful going it alone, and I encourage you to learn and try, but the resources and tools mutual fund managers have access to is incomparable to what me and you have.

That is another reason mutual funds are safe. The fund managers know what they’re doing. The fund needs to pay it’s employees and managers, so if the fund doesn’t make any money, no one gets paid. You can passively make money, while they take a small cut to pay the workers.

A lot of people believe mutual funds are better than ETF’s for that sole reason alone.

Is your Money Protected?

Because mutual funds are a traded equity, you are not protected from any trading losses. You are however protected if:

  • The fund engages in any fraudulent activity.
  • If the fund manager is negligent to market activity.
  • In some cases, if the fund goes bankrupt, you holding may be protected by investor funds insurance.

These are obviously extreme circumstances, ideally you will never cross paths with a fund that has one of these traits.

How to Assess a Mutual Funds Risk

Rule number 1… The level of risk in a mutual fund depends solely on what it is invested in. Before you pick a mutual fund, check out it’s current holdings and see if it fits your criteria.

Normally, a mutual fund that focuses on one industry, or one type of company will be higher risk. Broader, more diverse mutual funds tend to be the safer bet.

Here is a list of items to check out before diving into a mutual fund:

  1. Check the yearly return: If a mutual fund has consistent yearly returns it is a good sign risk is low, don’t count obvious anomalies such as the 2008 crash, but keep an eye out for anything abnormal. Volatile yearly returns means the fund is invested in volatile securities, which tend to be higher risk.
  2. Check the holdings in the fund: As I’ve mentioned, check to see if the fund is overweight in any one industry or company. To much money in one place is a recipe for disaster.
  3. Research the fund managers: The fund managers experience and track record will give you a good indication of his trading strategies. Are they level headed, or risk takers, but most importantly… Do they make money?
  4. How much is the fund holding in cash: If a fund is holding a lot of cash it can be a good thing. It shows the managers are waiting for the right opportunity to strike, rather than throw it all in at once. Considerable cash holdings can also protect you, if you ever withdraw from the fund.
  5. What is the funds Net Present Value (NPV): The net present value of a fund is how much assets it holds. Larger funds tend to be more stable and less risky, whereas smaller funds need to make more risks to gain a good return on investment.

To understand where you risk tolerance is in contrast to a fund you are looking at. Either talk to a financial advisor, or think about what your money means to you.

Only 56% of investors speak with a financial advisor about risk management. Of that 56%… 95% of them said they were happy with the advisors risk assessment of their investments… So get to your advisors office.

Risk Assessment of the Top 10 Mutual Funds

I’m not going to go to in-depth with this analysis, I plan to look at the previous 5 years returns, largest holdings, and reputation of the fund managers. I would suggest when doing your own research, go back 10 years, look at all holdings that occupy more than 5% of the funds capital, and also go through the checklist above.

These are the top 10 returning mutual funds in the last decade, let’s do some risk analysis:

#1. Fidelity Contrafund

  • Founded: 1967
  • Assets Under Control: $131 Million
  • 5 Year Cumulative Growth: 17.75%

This fund has the highest return on investment per year than any other on this list. It has consistent growth over the last 5 years with the only dips late in 2018, and through the 2020 pandemic.

Top 5 Industry Holdings:
IndustryPercentage of PortfolioS&P 500 Percentage
Information Technology35.81%28.71%
Communication Services18.94%11.10%
Consumer Discretionary14.09%11.44%
Health Care13.94%13.98%

Leaning more towards the tech industry, taking advantage of growth stocks such as Amazon, Facebook and Microsoft. Though the tech industry is well rounded, this fund is not as diverse as I would like as a risk averse person.

However the fund also focuses only on large cap stocks so they are less volatile.

The fund manager William Danoff, has managed this fund since 1990. He has seen 3 major stock market crashes and the fund still remains profitable. I think he is more than qualified to handle peoples money.

Overall I would say this fund is low-medium risk. Because of the heavy concentration on tech and communications, it could leave a big hole in the holdings if those sectors were to find hard times.

#2. American Funds Growth Fund of America

  • Founded: 1973
  • Assets Under Control: $235 Million
  • 5 Year Cumulative Growth: 15.48%

A good returning fund, with low volatility. This fund has seen higher than average growth over the last 5 years, most likely due to the tech boom in American stocks.

Top 5 Industry Holdings:
IndustryPercentage of PortfolioS&P 500 Percentage
Information Technology24.30%28.71%
Communication Services18.80%11.10%
Health Care16.80%11.44%
Consumer Discretionary15.70%13.98%

This is a much more balanced portfolio than the one above, however it does sacrifice on returns. For someone looking to save for retire this would be a great pick.

Again this fund focuses on growth stocks, with 85% of its holdings being large cap, and 90% of holding being part of the S&P 500 index.

As for management, the fund has 15 head managers, 13 of which have over 20 years experience investing in equity markets. This gives me hope someone knows what their doing!

This is definitely a low risk fund, a balanced portfolio and a well experienced team leads to good returns.

#3. Fidelity 500 Index Fund

  • Founded: 1988
  • Assets Under Control: $252 Million
  • 5 Year Cumulative Growth: 14.14%

We’re starting to see a trend… Solid 5 year returns with a very low volatility, other than the 2020 pandemic.

Top 5 Industry Holdings:
IndustryPercentage of PortfolioS&P 500 Percentage
Information Technology28.64%28.71%
Health Care13.94%13.98%
Consumer Discretionary11.41%11.44%
Communication Services11.08%11.10%

The closer the portfolio balance gets to the S&P 500 the more I like it. Following the best 500 companies in America is the safest way to make a profit.

Not only is this fund diverse, it holds a blend of growth and value companies, 99% of which are large cap.

The fund is actually managed by Geode Capital Management, which is an investment company which has been around since 2001. It has managed this fund from early 2003. The only problem with this is… I’m not sure who actually controls the money.

This is another great fund, quite low risk but with not knowing who is managing your money within the investment company… It can be stressful, so keep your whits about.

#4. American Funds Fundamental Investors Fund

  • Founded: 1978
  • Assets Under Control: $103 Million
  • 5 Year Cumulative Growth: 11.20%

This fund is the most consistent so far, it has had steady growth ever since the 2008 crash.

Top 5 Industry Holdings:
IndustryPercentage of PorfolioS&P 500 Percentage
Information Technology22.40%28.71%
Health Care14.50%13.98%
Consumer Discretionary12.43%13.98%
Communication Services10.40%11.10%

This is another well balanced portfolio, focusing on large cap stocks with a blend of growth and value companies.

The only thing to add to this portfolio is the amount of foreign assets it holds. Nearly 17% of the portfolios funds are overseas assets outside the US, which could lead to some currency losses, and unforeseen political corrections.

With all the American Funds held by Capital Group, they are managed by teams. This fund has 9 managers, all with over 20 years experience in the stock market.

This is a medium risk fund mainly because of its overseas assets, however the management teams experience is vast and they should be able to handle this fund well, as they’ve done in the past.

#5. Vanguard 500 Index Fund

  • Founded: 1976
  • Assets Under Control: $597 Million
  • 5 Year Cumulative Growth: 14.00%

This is one of the largest mutual funds in the world. With a healthy return on investment for the last 5 years, almost matching the S&P 500, you can’t say it wouldn’t be worth a look.

Top 5 Industry Holdings:
IndustryPercentage of PorfolioS&P 500 Percentage
Information Technology27.98%28.71%
Health Care14.01%13.98%
Communication Services11.40%11.10%
Consumer Staples8.40%6.89%

Following the S&P 500, this portfolio doesn’t stray to far from a balanced holding. However the top 10 companies in this fund make up 30% of it’s overall holdings which can put off some people.

The two managers of this portfolio, Donald M. Butler and Michelle Louie have 31 years experience in equities between them. Only working at the fund since 2016 and 2017 respectively, they are not long term managers of this fund.

This fund is a medium to high risk investment mainly because of the top 10 holdings, they have such a large percentage holding in these 10 companies, it could become very bad if a correction were to happen.

#6. American Funds Investment Company of America Fund

  • Founded: 1934
  • Assets Under Control: $99 Million
  • 5 Year Cumulative Growth: 10.40%

The oldest fund of the lot, but only a small holding of cash??? That’s because it’s not so much a growth fund, which the majority of people go for… It’s a value fund, focusing on long term large cap stocks.

Top 5 Industry Holdings:
IndustryPercentage of PorfolioS&P 500 Percentage
Information Technology19.60%28.71%
Health Care16.30%13.98%
Communication Services12.50%11.10%
Consumer Discretionary10.40%13.98%
Consumer Staples7.70%6.89%

There’s nothing much to say about the diversity of this fund, it is pretty standard for it’s size.

The fund managers however, all have been at Capital Group for over 20 years, and most have over 25 years experience in the stock market. Joyce E. Gordon the head manager has been with Capital group for 44 years.

This is a low risk fund which is well rounded. By staying away from highly volatile growth stocks, the fund is able to generate a modest return while still growing in value.

#7. Vanguard Total Stock Market Index Fund

  • Founded: 1992
  • Assets Under Control: $974 Million
  • 5 Year Cumulative Growth: 13.56%

This fund tracks the entire stock market, trying to match the market returns every year. Since created, it has had an average yearly return of 9.81%, compared to the overall market return in the same time period of 9.95%.

Top 5 Industry Holdings:
IndustryPercentage of PorfolioS&P 500 Percentage
Information Technology18.10%28.71%
Health Care16.21%13.98%
Communication Services11.53%11.10%
Consumer Discretionary11.42%13.98%
Consumer Staples8.32%6.89%

This fund is almost too diverse. Because it follows the entire market, it leaves itself open to bad companies dragging down profit.

Being the entire stock market, this fund also holds overseas stocks which as we all know can be dicey. Unknown currency changes and specific market conditions can all bring bad news to investors.

The fund managers, Gerard C. O’Reilly and Walter Nejman were both educated at Villanova University. Gerard actually has been a part of Vanguard since 1992, and became manager of the fund in 1994.

The fund is medium risk. Because of the overseas investments, unless you have extensive knowledge of the foreign stock markets you won’t be able to preempt any changes.

#8. American Funds Washington Mutual Investors Fund

  • Founded: 1952
  • Assets Under Control: $124 Million
  • 5 Year Cumulative Growth: 10.19%

This long lasting fund holds $124 million worth of capital, split into 90.5% large cap stocks, 9.3% mid cap stocks, and 0.2% small cap stocks. It got hit hard by the 2020 pandemic, but has fought back to realise a year to date loss of 1.93%.

Top 5 Industry Holdings:
IndustryPercentage of PorfolioS&P 500 Percentage
Health Care19.50%13.98%
Information Technology19.00%28.71%
Communication Services7.90%11.10%

Going a different route to the others in this list. This fund really focuses on dividend paying stocks that have a long history. It’s main goal is to provide investors with steady income through dividend payments, rather than share value.

The managers believe in a disciplined investing approach, that follows strict guidelines to screen for companies across a broad array of industries with strong balance sheets and consistent dividend payments. A side note… The fund refrains from drawing income from companies that primarily provide alcohol or tobacco products.

The nine managers all have over 20 years experience in the market, but all other than Alan Berro and Jeffrey Lager, have less than 7 years with the fund.

This fund is as low risk as low risk comes. Yes the stock market can fire shots that will decrease your share value a touch, but overall this fund will provide a solid income for years to come through dividends.

#9. Vanguard Global Small Cap Index Fund

  • Founded: 2010
  • Assets Under Control: $590 Million
  • 5 Year Cumulative Growth: 11.12%

Because this is a small cap fund, volatility can be high, but the fund has obviously had some very good picks to be returning 11.12% average per year.

Top 5 Industry Holdings:
IndustryPercentage of PorfolioS&P 500 Percentage
Information Technology14.30%28.71%
Consumer Discretionary13.40%13.98%
Health Care12.50%13.98%

This funds holdings are only 56.8% US companies… 11.6% come from Japan, 6.7% from the UK, and 3.5% from Australia. That is a very diverse fund, but the foreign companies might have an impact on growth if certain regions experience hardship.

This fund holds 4,231 stocks… That is crazy high, maybe even too high for someone wanting security in their investment. Even though this fund has a decent 5 year return, I wouldn’t want to be in 4,000 different stocks.

Let’s get straight into it… Being a small cap stock fund, it is very high risk to start, then you add the multiple country holdings and it goes even higher, then you add the 4,000 stocks and it all just gets too much.

#10. American Funds Capital World Growth & Income Fund

  • Founded: 1993
  • Assets Under Control: $98 Million
  • 5 Year Cumulative Growth: 8.08%

Another global stock fund… How fun! Can you tell I don’t like investing in multiple countries. Can this one change my mind?

Top 5 Industry Holdings:
IndustryPercentage of PorfolioS&P 500 Percentage
Information Technology16.30%28.71%
Health Care14.10%13.98%
Consumer Discretionary12.20%13.98%
Communication Services10.60%11.10%

Because of the diverse features of this fund, it will look appealing. But because it trades overseas assets, you need to look deeper to get a true feeling of what risk level your at.

The fund focuses on value stocks over anything else, having a lower return that speculative growth stocks, and lower volatility. It’s 10 year standard deviation is actually better than other funds trading similar assets.

The geographical breakdown shows that only 47% of the holdings are American companies, 25% are European, 18% Asian/Pacific Basin, and the rest in small change. The only other thing I want to mention is… The fund holds 4.1% of it’s money in cash, which is quite high, depending on what they plan to do with it, that could be good or bad.

This is a medium risk fund. I don’t like foreign investments, but the managers of this fund are highly talented investors. Also, because the fund focuses on value dividend stocks, rather than speculative growth companies, I believe it wants investors to feel safe.

Choose Wisely

Investing in a mutual fund can be stressful, so take your time and think…

  • Some mutual funds require you to stay invested for a set period of time.
  • If you are planning on a short term investment, the probability you will lose money goes up.
  • Choose a mutual fund with similar risk levels to what you’re comfortable with.
  • Once your money is in the fund, don’t overthink it.

To many investors second guess themselves, me included sometimes. So the best thing you can do is… When you invest your money, don’t look at it everyday, bide your time until you either hit your target.

Chris Race

I am an accountant from the U.K. specialising in Management Accounting, Personal & Business Tax, Financial Analysis, and Wealth Management. My passion for learning is what lead me to creating this blog. Stock market investing has always been a interest of mine, and since I was 18 years old... This interest has become a source of income for me and my family.

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