7 low-risk funds for the long haul

(Money magazine) -- This is the second part of Money magazine's series on How to make your money safer.

While mutual funds are managed by professionals, these pros are also human beings who make mistakes and come with varying degrees of skill. Time to put them to the test.

Step one: Minimize risks caused by fund managers

Start by screening for funds that beat their average category peers over the past three, five, and 10 years.

Great runs can't always be repeated, but "managers that underperform tend to continue to underperform," says Litman Gregory analyst Jack Chee.

You want funds with a proven track record over long periods. But you must also check to see that the fund's current managers are responsible for that record, so eliminate portfolios with manager tenures of less than 10 years.

Find value in funds: Invest for the long run

To make sure these long stretches of outperformance aren't hiding lousy patches, look for funds that also have beaten their peers in down years.

For instance, ProFunds Ultra-Nasdaq 100 (UOPIX), which seeks to deliver twice the daily performance of the 100 biggest stocks in the Nasdaq index, has beaten 80% or more of its peers over the past three, five, and 10 years. Yet this volatile fund lost around 70% of its value in 2002 and in 2008 -- not ideal for a risk-averse investor.

Step two: Minimize risks caused by the funds

Fund managers have to get paid, and that introduces yet another risk: fee drag.

Fund expenses come straight out of your returns. And while annual fees of 1.5% can sting in a year when your fund posts scant returns, it's the compounding effect of those costs that really eats into your long-term gains.

Exploring mutual fund fees

0:00 /1:53Exploring mutual fund fees

That's why we demand lower than average fees from all the funds in the MONEY 70, our recommended list of mutual and exchange-traded funds.

Step three: Look for funds that make the most of risk

Finally, "a good screen takes into account how much return you get relative to risk," says Lane Jones, chief investment officer at Evensky & Katz, a wealth management firm.

The fact is, even Steady Eddie funds bounce up and down, exposing you to some risk. That's unavoidable. At the end of the day, though, what you want are stock funds that will compensate you the most for each degree of volatility that they expose you to.

You can screen for this type of efficient risk taking by relying on something called the Sharpe ratio -- a technical measure, developed by the Nobel Prize-winning economist William Sharpe, that compares an investment's returns to its standard deviation. The higher a fund's ratio, the more attractive it is.

Low-risk funds: The results

These seven Steady-Eddie funds have delivered over time.

Buffalo Growth (): Looks for U.S. businesses with global diversification to reduce risk.

• Expense ratio: 0.99%
• 5-year rank*: 22
• Sharpe ratio: 0.80

Fidelity Growth Co. (FDGRX): Its manager beat over 90% of his peers in the past 3, 5, 10, and 15 years.**

• Expense ratio: 0.84%
• 5-year rank: 6
• Sharpe: 1.02

FPA Capital (FPPTX): Seeks stocks with strong balance sheets and low valuations.**

• Expense ratio: 0.84%
• 5-year rank: 9
• Sharpe: 0.75

Harbor Capital Appreciation (HCAIX): A focus on high-quality growth stocks helped it weather recent bears.

• Expense ratio: 1.05%
• 5-year rank: 16
• Sharpe: 0.86

Sequoia (SEQUX): The managers will keep money in cash if they can't find cheap stocks.**

• Expense ratio: 1.00%
• 5-year rank: 1
• Sharpe: 1.40

T. Rowe Price Mid-Cap Growth (RPMGX): Seeks out fast-growing but steady growth companies.**

• Expense ratio: 0.80%
• 5-year rank: 14
• Sharpe: 1.01

Yacktman (YACKX): This value-minded fund has beaten 99% of its peers over past 15 years.

• Expense ratio: 0.80%
• 5-year rank: 1
• Sharpe: 1.27

resource:http://money.cnn.com/2012/06/05/investing/stock-mutual-funds-investments.moneymag/index.htm

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Mutual funds: Not quite as bad a deal as we thought

Legg Mason's famed manager Bill Miller, who recently called it quits

Fortune -- A new study suggests that investing in mutual funds might not be a waste of money. It's lowly praise, but it's a better review of the popular investment vehicles than they have recently been getting.

The prevailing view these days puts the average mutual fund manager somewhere between dope and charlatan. Critics have long contended that individuals would be better off in an index fund, which blindly invests its money in say the S&P 500, rather than going with one of the thousands of funds that try to pick individual stocks.

MORE: Is your 401(k) ripping you off?

Last year, for example, 84% of mutual fund managers failed to best a similar index. Even on Wall Street, indexing seems to be winning more of the day. In the past few years, more and more money has been going into ETFs and other funds that tend to track indexes.

But has the criticism of mutual funds gone too far? Perhaps. The new study, which was released this week by National Bureau of Economic Research, finds that a lot of mutual fund managers do earn their keep. And funds that do well tend to stay hot for a while. What's more, individuals seem to do a pretty good job of picking the funds that will be the winners.

MORE: 4 ways investors can still find yield

The problem is this is not as great news for fund investors as it appears. Unlike other studies, Measuring Managerial Skill in the Mutual Fund Industry asset-weighted mutual fund returns. So gains and losses at larger funds entered more into the calculations of the two co-authors, two economics professors, one from Stanford and the other from Kellogg's graduate business school, than smaller funds. And larger funds, had a tendency to outperform their index, or at least underperform less, than smaller funds. So while the study did find that the majority of the funds, 57%, tended to lose money relative to index funds, overall, the average mutual fund manager, propelled by the returns of the larger funds, added value.

The fact that individuals were able to pick the funds that would do better than average was also a mix blessing. The study found that those funds, recognizing their superior performance, usually increase their fees, quickly erasing any gain individuals got from selecting the better managers. "There are a lot of people who say active management is bad deal because investors have to pay a fee," says Jonathan Berk, teaches economics at Stanford University's graduate school of business. "What we found is that managers do make the fee up with their skill, and then take it away in compensation. So investors should be indifferent."

In the end of the day, the study may do a better job of explaining why tens of thousands of mutual funds still exist. But it doesn't really offer a compelling reason to put your money in them. Pick correctly, which many may do, but certainly not everyone, and actively managed funds aren't any worse than an index fund. So in the best case scenario, selecting an actively managed fund is a waste of time, though perhaps not money. How's that for a ringing endorsement.

Recourse:http://finance.fortune.cnn.com/2012/06/27/mutual-funds/?iid=MF_MKT_News

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