86 views 15 mins 2 comments

Balancing Risk and Reward: Understanding Volatility in the BEST Mutual Funds


Volatility is a measure of how much a mutual fund's net asset value (NAV) fluctuates over time. It is often used as an indicator of risk, as higher volatility means more uncertainty and potential losses.

However, volatility can also offer opportunities for higher returns, as investors can benefit from price movements in both directions. In this blog post, we will explain what volatility is, how it is calculated, and how it affects the performance of mutual funds. We will also provide some examples of high-volatility best performing mutual funds in the U.S. that you can consider for your portfolio.


Investing in mutual funds can be an excellent way to grow your wealth and achieve your financial goals. However, with great potential returns also comes the inherent risk of volatility. It's crucial to understand the concept of volatility and its impact on mutual funds before making investment decisions. In this article, we will delve deep into the topic of balancing risk and reward, focusing on understanding volatility in the best mutual funds. So, let's explore the world of investments and equip ourselves with the knowledge to make informed choices.

The Significance of Balancing Risk and Reward

When it comes to investing in mutual funds, finding the right balance between risk and reward is key. Balancing risk and reward allows investors to maximize their potential returns while managing the level of risk they are comfortable with. By understanding volatility, investors can make informed decisions that align with their investment objectives and risk tolerance.


What is Volatility and How is it Measured?

Volatility is the extent to which a fund's NAV typically fluctuates. It reflects the variability of returns that a fund generates over a given period of time. A fund with high volatility will have large swings in its NAV, while a fund with low volatility will have smaller changes in its NAV.

There are different ways to measure volatility, but one of the most common methods is to use the standard deviation. The standard deviation is a statistical measure that shows how much the fund's returns deviate from their average. The higher the standard deviation, the higher the volatility. For example, if a fund has an average return of 10% and a standard deviation of 5%, it means that its returns can range from 0% to 20% in any given year.

Another way to measure volatility is to use the beta. The beta is a measure of how sensitive a fund is to the movements of the market or a benchmark index. The beta compares the fund's returns to the market's returns and shows how much they move together.

A beta of 1 means that the fund moves exactly in line with the market, while a beta of more than 1 means that the fund is more volatile than the market, and a beta of less than 1 means that the fund is less volatile than the market. For example, if a fund has a beta of 1.5, it means that it tends to move 50% more than the market in either direction.


How Does Volatility Affect Mutual Fund Performance?

Volatility affects mutual fund performance in two ways: risk and reward. Risk is the possibility of losing money or not achieving your investment goals. The reward is the potential for earning money or exceeding your investment goals.

Generally speaking, there is a trade-off between risk and reward: higher volatility means higher risk but also higher reward, while lower volatility means lower risk but also lower reward. This trade-off can be illustrated by using the Sharpe ratio, which is a measure of how much excess return a fund generates per unit of risk. The Sharpe ratio divides the fund's return above the risk-free rate (such as a Treasury bill) by its standard deviation. The higher the Sharpe ratio, the better the fund's risk-adjusted performance.

However, volatility is not always bad for investors. Volatility can also create opportunities for investors who are willing to take advantage of price fluctuations and buy low and sell high. Volatility can also reflect positive changes in the fund's underlying securities, such as earnings growth, innovation, or mergers and acquisitions. Volatility can also be reduced by diversifying your portfolio across different asset classes, sectors, regions, and strategies.

Managing Volatility in Mutual Funds

While volatility is inherent in the world of investments, there are strategies investors can employ to manage and mitigate its impact. Let's explore some approaches to managing volatility in mutual funds:

  1. Diversification: Diversifying your investment portfolio across different asset classes, sectors, and geographic regions can help reduce the impact of volatility. By spreading your investments, you can potentially offset losses in one area with gains in another.
  2. Dollar-Cost Averaging: Implementing a dollar-cost averaging strategy involves investing a fixed amount at regular intervals, regardless of market conditions. This approach allows you to buy more shares when prices are low and fewer shares when prices are high, effectively reducing the impact of short-term market fluctuations.
  3. Asset Allocation: Adjusting the asset allocation within your portfolio based on your risk tolerance and investment goals can help manage volatility. By rebalancing your holdings periodically, you can ensure your investments align with your desired risk-reward profile.
  4. Long-Term Perspective: Taking a long-term view can help smooth out the effects of short-term volatility. Investing in mutual funds with a proven track record of consistent performance over the years can provide greater stability and potential for growth.
  5. Regular Review and Monitoring: Keeping a close eye on your mutual fund investments and regularly reviewing their performance is essential. This allows you to identify any significant changes or trends that may impact the fund's volatility and make necessary adjustments.

Factors Influencing Volatility in Mutual Funds

Various factors contribute to the volatility of mutual funds. Understanding these factors can provide valuable insights into the potential risks and rewards associated with different funds. Let's explore some key factors influencing the volatility of mutual funds:

  1. Market Conditions: The overall market conditions play a significant role in determining the volatility of mutual funds. During periods of economic uncertainty or market downturns, the volatility tends to increase as investors react to changing conditions.
  2. Asset Allocation: The mix of asset classes within a mutual fund portfolio can affect its volatility. Funds with a higher allocation to stocks are generally more volatile than those with a higher allocation to bonds or other fixed-income securities.
  3. Fund Size: The size of a mutual fund can impact its volatility. Smaller funds may experience greater volatility due to their limited resources and liquidity constraints compared to larger funds.
  4. Investment Strategy: Different investment strategies can lead to varying levels of volatility. Aggressive growth funds, which focus on high-growth stocks, tend to be more volatile than conservative funds that prioritize stability and income generation.
  5. Sector Concentration: Mutual funds that are heavily concentrated in a specific sector or industry are more prone to volatility. Economic or regulatory changes affecting that sector can significantly impact the fund's performance.

How can I use volatility to my advantage?

You can use volatility to your advantage by taking advantage of price fluctuations and buying low and selling high. You can also choose funds that have higher volatility but also higher returns, such as sector funds, growth funds, or leveraged funds. However, you need to be aware of the risks involved and have a high tolerance for volatility.

Are all high-volatility funds bad investments?

Not necessarily. High-volatility funds can offer greater growth potential over the long term, but they also come with increased risk. It's crucial to assess your risk tolerance and investment objectives before investing in high-volatility funds. Consider consulting with a financial advisor who can provide personalized guidance based on your specific circumstances.

Can volatility be predicted accurately?

While it is challenging to predict volatility with absolute certainty, analysts and fund managers employ various strategies and tools to assess and estimate volatility. Historical data, statistical models, and market indicators are among the factors used to gauge potential volatility. However, it's important to note that predicting volatility accurately is inherently difficult due to the dynamic and unpredictable nature of financial markets.

How does volatility impact investment returns?

Volatility can impact investment returns in multiple ways. Higher volatility often leads to wider price swings, increasing the potential for both significant gains and losses. Investors with a lower risk tolerance may find higher volatility unsettling and prefer more stable investments, while others may embrace volatility as an opportunity to generate higher returns.

What is the difference between volatility and risk?

Volatility is a measure of how much a fund's NAV fluctuates over time, while risk is the possibility of losing money or not achieving your investment goals. Volatility is one aspect of risk, but not the only one. Other factors that affect risk include liquidity, credit quality, currency, inflation, and interest rates.

How can I reduce the volatility of my portfolio?

You can reduce the volatility of your portfolio by diversifying your investments across different asset classes, sectors, regions, and strategies. You can also choose funds that have lower volatility or that use strategies to hedge against market fluctuations, such as low-volatility funds, balanced funds, or alternative funds.

High Volatility Best Mutual Funds

If you are looking for high-volatility best performing mutual funds in the U.S., you may want to consider some of the following options. These funds have shown strong returns in the past year, but also carry higher risk than average.

  • Shelton Nasdaq-100 Index Direct (NASDX): This fund tracks the performance of the Nasdaq-100 Index, which consists of 100 of the largest non-financial companies listed on the Nasdaq stock market. The fund has a low expense ratio of 0.25% and has gained 32.76% in the past year.
  • Hotchkis & Wiley Mid-Cap Value (HWMIX): This fund invests in mid-cap companies that are undervalued by the market. The fund has high exposure to energy and financial sectors, which have been volatile but also rewarding. The fund has an expense ratio of 0.95% and has gained 9.71% in the past year, outperforming its category average by 10.41%.
  • iPath S&P 500 VIX Short-Term Futures ETN (VXX): This fund is not a mutual fund, but an exchange-traded note that tracks the performance of the S&P 500 VIX Short-Term Futures Index. This index measures the expected volatility of the S&P 500 over the next 30 days, based on the prices of VIX futures contracts. The fund has an expense ratio of 0.89% and has gained 55.25% in the past year, but also has a very high risk of losing value rapidly.
Term Loan

Volatility is an important factor to consider when investing in mutual funds. It can affect both the risk and the reward of your investments. Volatility can be measured by using different methods, such as standard deviation or beta. Volatility can also be influenced by various factors, such as market conditions, fund characteristics, or investor behavior. Volatility can be both a challenge and an opportunity for investors who are willing to balance risk and reward.

If you are interested in investing in high volatility best performing mutual funds in the U.S., you can check out some of the examples we provided above or do your own research using online tools and resources. However, you should always do your due diligence before investing and consult a financial advisor if you have any questions or doubts.

Also Read: Hidden Gems: Uncovering the Underrated BEST Mutual Funds


This blog post is for informational purposes only and does not constitute investment advice or recommendation. You should consult your financial advisor before making any investment decisions.
/ Published posts: 129

Meet Amit Ahuja, a passionate and driven individual with a multifaceted interest in business and finance. Amit's curiosity for the world of commerce knows no bounds, as he eagerly delve into market trends, investment strategies, and entrepreneurial success stories. Always on the lookout for opportunities to grow his knowledge, Amit avidly follows financial news and actively participates in networking events to gain insights from industry experts.

2 comments on “Balancing Risk and Reward: Understanding Volatility in the BEST Mutual Funds
Leave a Reply