Fund Tools

Screen funds based on their Return and Risk at Morningstar

Fund snapshot of Fidelity Contrafund

Riskgrades for an individual fund

RiskGrade for Fidelity Contrafund

Compare two funds at
Morningstar

Risk vs. Return

Fund Return

Fund return is the sum of 

a)  Yield and 

b) Change in the share price. e.g. Average annualized total return for the calendar year, past 1 year, past 3 years or past 5 years.

Top funds sorted by YTD, 1 yr, 3yr and 5yr returns are found at Bloomberg

Fund returns before and after tax are close for index funds and some actively managed funds. These are called tax-efficient funds. Some funds are not tax efficient and may be candidates only for tax-deferred accounts such as an IRA.

Investors chase performance and buy funds too late and sell them too soon and investor returns are different from fund returns. Read about them at Morningstar. 

Fund Risk

Volatility in the share price of mutual funds due to factors such as market risk, interest rate risk or currency risk of the securities in the mutual fund. There are several measures of risk:

Beta: Risk relative to the market (beta=1.0). Higher than 1.0 indicates fund is riskier than the market.

R-squared: Correlation of the fund with the S&P 500. Higher correlation means fund more in step with the market. Permanent Portfolio fund is an example of a fund with a low R-squared.

Standard deviation: Volatility of the fund. Higher number generally indicates more risk.

P/E: Price to earnings ratio. Higher number generally indicates more risk.

P/B: Price to book ratio. Higher number generally indicates more risk.

Largest one month or quarterly loss.

% of assets in one sector: Risk is higher if a fund has very heavy weighting in a sector(s).

% of assets in top 5 stocks: Risk is higher if a fund has very heavy weighting in the top 5 stocks.

Morningstar risk: Proprietary risk measure.

Fund risk vs. return

Generally, the more the risk, the more is the potential return
                      - "No pain, no gain".

A higher return means taking more risk, taking more risk does not mean
a higher return.

Growth funds have higher return and higher risk.
Income funds have moderate return and moderate risk.
Money market funds have lower return and lower risk.
 
Morningstar rates a fund by comparing a fund's return relative to its risk. Morningstar rates the fund compared to all funds and also compared to funds in its category (peer rating).

Another useful tool is to plot the fund return (e.g. 5 yr. return) on the vertical axis and the fund risk (e.g. 5 yr. standard deviation) on the horizontal axis. High performers generally carry more risk. 

Some funds may have low returns with high risk (not desirable), 
while some may have high returns with low risk (desirable). 

Look at the graph below. Fund B has higher return and lower risk than the S&P500 and the other three funds. 

Other Risk versus Return measures:

Alpha: Difference between a fund's actual returns and its expected performance given its beta (measure of fund's risk).

Sharpe ratio: Calculate the annualized return of a fund in excess of the T bill rate and divide it by the fund’s standard deviation.

Treynor ratio: Calculate the annualized return of a fund in excess of the T-bill rate and divide it by the fund’s beta. 

Read excellent article on risk here.