4 Important Statistics Related to Mutual Fund Investments

When you are considering mutual fund investments, you may be confused by ratings systems that attempt to quantify the value of an investment. The value of any investment is typically associated with the price of its shares; in an efficient market, the price would always reflect underlying value. Unfortunately, because many investors and advisers are not always reasonable and efficient, pricing may be set too high or too low, considering the actual value of the underlying securities in a mutual fund. These statistics can help shed light on that value. 

1) Volatility

Volatility is a word generally associated with risk. It is the chance that a fund will be trading at a very different value next month than it did this month. Volatility is difficult to measure on a very young fund; aged funds, though, do have consistent patterns of volatility. Over the years, the returns these funds post can be plotted to understand how much they differ from term to term. Less volatile stocks tend to be more valuable for the standard investor who is looking at a mutual fund as a low to medium risk investment. Stocks with high volatility may be much riskier, but they can still attract risk hungry investors.

2) Standard Deviation

Volatility is measured in terms of standard deviation. Standard deviation shows how far apart returns are from term to term. For example, if a group of people in a room are aged five, seven and nine, the standard deviation between ages would be two years. This is a simple model, but the same basic calculation is used for mutual fund standard deviation. The lower the standard deviation, the more stable a fund is over time, and the less risky it is for an investor. This will generally result in a higher value.

3) Beta

Beta is a variable used to compare a mutual fund to a benchmark. That benchmark can be chosen by an analyst. For example, if an investor wants to know whether a mutual fund is trading at a more consistent standard deviation or less consistent standard deviation than the market as a whole, they may compare it to the S&P 500 because it is considered a strong market indicator. The closer the beta is to one, the less volatile the fund, and the more it is behaving like the market as a whole. A fund with a beta over one is more volatile, and a beta below one represents a less volatile fund.

4) Net Asset Value

Net asset value is one measure of the price of the shares of a fund. It is found by totaling the value of each security in a portfolio, less liabilities, divided by the number of shares outstanding in the fund. Since a mutual fund pays out capital gains and income instead of holding them to build the value of the fund, the net asset value of a mutual fund is not an indicator of its profitability. Instead, it is used to set the price of shares in the fund on a daily basis.

blog comments powered by Disqus