MEASUREMENTS OF RISK

How do you know how risky a mutual fund is to invest in? Mutual funds make it easy for you to decide by giving you several risk measurements to look at. Some measures may be found in a fund's prospectus. However, one can find mutual fund statistics in the financial press or from commercial investment information services such as Value-Line or Morningstar.

A good way to judge how a fund is doing is to compare it to the rest of the overall market.

One such measure of a fund's sensitivity to market performance is called beta. It measures the value changes of the fund against the ups and downs of the market.

The market is said to have a beta of 1. If the beta of a mutual fund is also 1, you can be pretty sure the behavior of the fund will follow along with the direction of the whole market. A beta higher than 1 means the fund is more volatile than the market. A fund with a beta of 1.20 is 20 percent more volatile than the market.

A second way to measure the risk of your fund is by looking at R2(R-squared). The R2 statistic compares how two investments vary with one another.

In the case of a mutual fund, R² measures how much of a fund's past performance could have been predicted by the returns of the overall market. If R² is 1, its performance has followed that of the market almost exactly. An R²of 0, on the other hand, means the performance of the fund is not related to the performance of the overall market.

A fund's turnover rate lets you know how often the fund buys and sells securities in its portfolio.

A turnover rate of 50 percent, for example, tells you the fund sold and reinvested securities valued at half of the fund's entire worth during the year. Mutual funds that are aggressively managed tend to have high turnover rates.

The last thing to keep in mind when you look at risk is the financial strength of the companies in the fund. Emerging growth companies with lower yields will be more unstable than mature companies.

None of these statistics should be viewed alone. One should view the statistics in relationship to each other and in comparison to other, similar funds.

In order to really understand how your funds are doing, you will need to be able to translate all those strange symbols you see in the newspaper every day.