The Best Mutual Funds for Safety and Stable Returns
Best Types of Funds for Conservative Investors
If you are looking for the safest mutual funds to buy, you are likely looking for funds that provide stability of return. In the world of financial planning, these funds are recommended for investors who are more interested in preservation of their assets, as opposed to growth. For safety and stability, mutual fund investors may consider certain bond funds and conservatively invested balanced funds.
The Safest Investments Are Not Always the Best Investments
Before providing examples of the safest mutual funds, let's define what we mean by safety. Remember that safe doesn't always mean guaranteed; safe generally means protecting your savings, which may also mean staying ahead of inflation or preserving the purchasing power of your money.
To successfully preserve your assets, you may need to take at least enough risk to match the rate of inflation. The long-term average rate of inflation, as measured by the Consumer Price Index (CPI) is around 3.0%. This means, if your investment objective is preservation of assets, it's wise to find investments that can provide an average return of 3.0% or more.
If you are thinking that the safest investments to buy are guaranteed, you may not find them in the primary investment securities, such as stocks, bonds and mutual funds, which have risk of losing principal. If you want guaranteed principal, you'll need to put your money in an FDIC insured bank account or certificate of deposit (CD). But in exchange for the guarantee, you may not succeed in matching or staying ahead of inflation.
The Safest Mutual Funds You Can Buy
The safest mutual funds that can either match or stay ahead of inflation by a small degree are bond funds. Short-term bond funds are generally safer and more stable than intermediate- to long-term bond funds. Also, US Treasury Bonds are generally safer than municipal and corporate bonds.
A good example of a bond fund that invests in short-term US Treasury bonds is Vanguard Short-Term Treasury Fund (VFISX). Since inception of the fund in 1991, VFISX has produced and average rate of return of approximately 3.9%. Past performance is no guarantee of future results but it's long history suggests that the fund can outpace inflation.
Keep in mind that bond funds are not guaranteed, even though they may invest in one of the safest investments, US Treasury bonds. Because the investor is not holding bonds (they are holding shares of the mutual fund), bond funds can lose money, although this is not a common occurrence.
Best Mutual Funds for Stability
When investors say they are seeking safety, they often mean that they want stability in price or low fluctuation in value. The types of mutual funds for stability will usually be balanced funds or target-date retirement funds, which are mutual funds that invest in a balance of stocks, bonds and cash, or other mutual funds, within one fund.
Sometimes called "funds of funds," balanced funds and target-date funds can diversify the holdings in such a way that losses are rare but long-term returns are higher than most bond funds. This lower relative volatility is achieved through diversification and through higher allocation to low-risk assets, like bonds, and lower allocation to high-risk assets like stocks.
One of the best balanced funds with a history of stable returns above the rate of inflation is Vanguard Wellesley Income (VWINX). This 40-year old fund has averaged 9.7% since its inception in 1970. This is an incredibly high return, considering that its portfolio consists of roughly two-thirds bonds and one-third stocks.
As for target-date retirement funds, the lowest risk, most stable funds will usually be those with a target date year close to the current year. For example, Vanguard Target Retirement 2020 (VTWNX) is appropriate for investors who may begin making withdrawals in the year 2020 or within that decade. Because of its short-term objective, the asset allocation is roughly 50% stocks and 50% bonds, and will continue to become more conservative as years progress.
Bottom Line on Investing in Mutual Funds for Safety and Stability
Before deciding to make your priority safety or stability, be sure to know your priorities. If you need your money in less than three years, it's not in your best interest to invest in mutual funds. And if your priority is safety, and you don't mind earning near-zero interest, mutual funds are probably not the best choice.
But if you want to keep up with (or outperform) inflation with your investments, you'll need to take some degree of market risk, which includes volatility (the up and down swings in price). If you are not sure how much risk is right for you, try measuring your risk tolerance.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
The Wharton School of the University of Pennsylvania. "Understanding Risk and Return: The Roller Coaster Ride of Investing," Accessed Nov. 20, 2019.
Federal Reserve Bank of Minneapolis. "Consumer Price Index, 1800-" Accessed Nov. 20, 2019.
Federal Deposit Insurance Corporation. "What's Covered," Accessed Nov. 20, 2019.
United States Securities and Exchange Commission. "Interest Rate Risk," Page 4. Accessed Nov. 20, 2019.
Arizona Corporation Commission. "Investor Knowledge Quiz," Page 10. Accessed Nov. 20, 2019.
Vanguard. "Vanguard Short-Term Treasury Fund Investor Shares (VFISX)," Accessed Nov. 29, 2019.
United States Securities and Exchange Commission Investor.gov. "Bond Funds and Income Funds," Accessed Nov. 20, 2019.
United States Securities and Exchange Commission Investor.gov. "Target Date Funds," Accessed Nov. 20, 2019.
Vanguard. "Vanguard Wellesley Income Fund Investor Shares (VWINX)," Accessed Nov. 29, 2019.
Vanguard. "Vanguard Target Retirement 2020 Fund (VTWNX)," Accessed Nov. 29, 2019.