Stock Funds: Risk Assessment

Stock Funds: Risk Assessment

Small funds are more likely to soar – and more likely to flop

When it comes to safety, big stock funds, are often better. Smaller stock funds may carry bigger rewards, but they also carry bigger risks. “You’re more likely to find a smaller fund that soars, but you’re also more likely to get a fund that flops,” say many experts.

Generally, the specialists divide stock funds into four groups based on their assets, average assets among diversified stock funds being $500 million or so. The results: The very smallest funds – those ranking in the bottom 25 percent in assets – didn’t necessarily generate poorer results each year. In fact, on average the smallest funds come out on top sometimes. But a look at the worst-performing funds in each year for the four different size groups shows a different picture. In 9 of the 10 years, the biggest losers come from the smallest 25 percent of all funds, a group that today would include funds with less than $12 million in assets.

Small funds have a lot of pluses, including an ability to move quickly to gain investing advantages. But, smaller funds also generally carry huge annual fund expenses that cut into investors’ returns. Big funds, though lumbering, have other advantages, including deep research capabilities and more consistent performance.

Risk Assessment. Photo by Elena

Mixing Principles and Profit

You can choose to put your money in socially responsible funds. Investors who want to put their money where their ethics are can choose from about fifty such funds. Socially responsible investing, or SRI, involves screening out companies heavily involved in activities like gambling or weapons production, for example, and picking companies with good records on the environment, treatment or minorities, and other social issues.

Do socially responsible investors sacrifice monetary rewards? Hardly. Many of the largest have turned in fairly respectable returns over the past years. Experts award an A to funds with strict criteria for choosing companies with above-average social profiles. B goes to funds that invest in firms with some share-holder activism and that may emphasize avoiding bad companies rather than finding good ones. C is given to funds with minimal or no shareholder activism.