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 preserving 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 safety doesn't always mean guaranteed it generally means protecting your savings. It can 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 inflation rate. The long-term average rate of inflation, as measured by the Consumer Price Index (CPI) is around 3.0%. If your investment objective is to preserve assets, it's wise to find investments that can provide an average return of 3.0% or more.
If you think 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—as these risk loss of principal. If you want a 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 the inception of the fund in 1991, VFISX has produced an average rate of return of approximately 3.9%. Past performance is no guarantee of future results, but the 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 minimized value fluctuation. 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 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. These returns are 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.
The Bottom Line
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.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.