What Is a Mutual Fund's Beta?

Beta Definition: What You Should Know & How to Use it for Mutual Funds

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When choosing the best mutual funds for you, it's useful to understand it's risk before you buy. This is where the mutual fund beta can help. Beta can be used as a predictor of the fund's volatility, or movement in price up and down, compared to a benchmark. Investors can use beta to measure market risk and to see if the fund is appropriate for their risk tolerance.

Mutual Fund Beta Definition and Examples

Beta, with regard to mutual fund investing, is a measure of a particular fund's movement (ups and downs) compared to the overall market. The beta for the market is 1.00. If the mutual fund beta is 1.10, this indicates that the fund has performed 10% better than its benchmark index in up markets and 10% below the index in down markets.

For example, if a fund's benchmark index is the S&P 500 and the index has a return of 10% this year, the investor would expect the fund with a beta of 1.10 to have a return of 11%. Conversely, if the S&P 500 index fell 10% during the given year, the fund with a beta of 1.10 would be expected to fall 11% during that year.

A fund can also have a beta that is lower than the benchmark index. In this case, if the fund's beta is 0.90, an investor can expect the fund to perform 10% lower than the index in up markets but 10% better in down markets. For example, if the index gains 10%, the fund would be expected to gain 9%. But if the market falls 10%, the fund would be expected to decline in value by 9%.

How to Use Mutual Fund Beta

A mutual fund investor can use beta in planning their fund selection. This is done to determine volatility of the fund and to compare its sensitivity in movement to the overall market. Beta measures that are higher than 1.00 will indicate higher highs but lower lows (wider swings in price or NAV for mutual funds).

A mutual fund investor looking for a fund with less volatility (less swings in price or NAV) might look for funds with betas lower than 1.00. Investors may also choose to diversify around a core holding buy selecting other funds with different betas than the index. In this regard, beta can be used for planning for fund diversification and can be used as part of the process of building a portfolio of mutual funds.

Aggressive investors who are comfortable with market volatility can consider buying a fund with a beta above 1.00. Conservative investors that prefer less volatility than its benchmark may want to choose a fund with a beta below 1.00.

Should You Use Beta to Choose a Fund?

Now that you know how the beta for mutual funds works, one question may still remain: Should you use beta for researching mutual funds?

Beta is a statistical measure that can be quite useful for diversification and advanced risk/volatility measurement purposes. However it's not necessary to use beta in the process of choosing mutual funds. The overall risk of a given portfolio is determined by its unique asset allocation (how you mix various types of funds together).

To be sure your portfolio is diversified, you can carefully select funds that are in different categories. For example, if you use an S&P 500 index fund for a core holding, you will need to choose other funds that are not investing in the same holdings as the index. In this case, since the S&P 500 index consists of large U.S. stocks, the investor could diversify with other types of funds, such as small-cap stock, international stock, and bonds. 

Bottom Line

The bottom line on beta for mutual funds is that this statistical measure can help to predict the volatility of the fund. This can help to insure that the investor is selecting a fund that suits their risk tolerance and investment objective. Beta can also be used to help diversify a portfolio. However, beta is not absolutely necessary to do this. To be diversified, investors simply need to make sure their mix of funds represent different categories.

The Balance does not provide tax, investment, or financial services and advice. The information is 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.

Article Sources

  1. Morningstar. "Beta: What is Beta?" Accessed May 29, 2020.

  2. Fidelity.com. "The guide to diversification." Accessed May 29, 2020.