1. Perspectives on the Risk-Return Relationship
  2. Understanding Mutual Fund Returns
  3. Fund I-Q No.2: Favorable Risk-Return Profile
  4. Scoring Risk-Return Data
By Richard Loth (Contact | Biography)

This is the entry we need to complete in the Fund Investment Quality Scorecard for an analysis of a fund's risk-return profile:



Obviously, the greater the positive risk-return spread, the more favorable the rating. Negative spreads fall into the "other" classification and are not indicative of investment quality in the Fund I-Q Scorecard.

It is important to understand that all mutual fund investment research services use similar risk-return qualifiers. These indicators measure a fund's risk-return relationship within the context of its investment category (large cap value, small cap growth, etc.) and not the whole mutual fund universe. Each fund category has differing investment characteristics, making a universal risk-return qualification impossible - and inappropriate. With mutual fund risk-return classifications, as well as other types of investments, it is simply a necessity to make "apples to apples" comparisons.

Morningstar's well-known star ratings reflect historical risk-adjusted performance and are extremely popular with investors shopping for mutual funds. However, while helpful in this process, even Morningstar cautions the investing public that "the star rating is a useful tool, but it's no substitute for doing your homework. Investing is much too complex for any single measure to sum up the entire merit of a security."

Therefore, serious fund investors should embrace the use of the Fund Investment-Quality Scorecard in making fund investment decisions. While this approach does require a bit of "homework," it will allow for a solid, thorough treatment of mutual fund analysis.

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