Benchmarks incurred sharp losses to end a choppy August. To put things into perspective, the Dow, the S&P 500 and the Nasdaq lost 1.7%, 1.8%, and 2.6%, respectively. Further, the three major indexes posted their first monthly decline since May and the second for this year.

Intensifying trade conflict between the United States and China contributed immensely to losses. Further, China decided to impose import duties on U.S. agricultural products and its central bank fixed the mid-point of yuan to below the psychological level of 7 per U.S. dollar.

Further, the latest report regarding the state of America’s manufacturing sector doesn’t appear to be rosy either. The U.S. manufacturing sector appears to be heading towards a recession.

The Institute of Supply Management (ISM)’s manufacturing index hit more than a 3-year low in August. The ISM manufacturing index decreased to 49.1% in August from 51.2% a month earlier. The reading not only came in below the consensus estimate of 51.3%, but also fell to its lowest settlement since January 2016.

Any reading below the 50% level indicates a contraction in manufacturing activity. Further, the new orders index and the production index fell to 47.2% and 49.5%, respectively. Only nine of the 18 industries surveyed reported gains in the month.

Meanwhile, U.S. construction spending for July increased 0.1% but remained below the consensus estimate of 0.4%. Such dismal economic reports added to fears of an impending recession and led to broad-based losses for the markets.

Under such jittery conditions, mutual funds that are likely to offer steady returns along with lower level of risk are popular choices. But to identify funds that can offer such encouraging features, one should find out a way at measuring a fund’s risk-adjusted return. This is where the Sharpe ratio comes into play. Created by Nobel laureate William F. Sharpe, the Sharpe ratio is one of the popular ways of measuring funds’ performances on the basis of risk-adjusted return. A fund with a higher Sharpe ratio is believed to be more attractive than one with a lower ratio.

What Does Sharpe Ratio Mean for Mutual Funds?

The Sharpe ratio of a mutual fund measures its average return relative to the level of volatility the fund experiences. It indicates the value that a fund delivers for the risk it poses, in other words, its risk-adjusted return. The numerator of the ratio consists of a fund’s mean return over a given time period subtracted by the return of a risk-free investment over the same period, say U.S. government Treasury bonds or bills. Meanwhile, its denominator comprises standard deviation of a fund’s return, which measures the level of fluctuation of returns, over the same time frame.

So, Sharpe Ratio = (Average Return - Risk Free Return)/Standard Deviation

This ratio indicates how much extra return one can derive from a portfolio by taking additional risk. It is generally believed that Sharpe ratio calculated over a three-year or longer period of time should be considered while assessing the performance of a fund in terms of risk-adjusted return. We have already seen that the higher the Sharpe ratio, the more will be the fund’s attractiveness among risk-averse investors. Moreover, most investors think mutual funds with a Sharpe ratio higher than 1 are good investment options.

4 Best Choices

We have, thus, selected four mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging one and three-year returns. Additionally, the minimum initial investment is within $5000 and each of these funds has a three-year Sharpe ratio which is greater than 1.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds.

Red Oak Technology Select (ROGSX - Free Report) fund invests a large portion of its assets in securities of companies from the technology sector. The fund invests in both U.S. and non-U.S. stocks.

This Zacks sector - Tech product has a history of positive total returns for more than 10 years. 

ROGSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.94%, which is below the category average of 1.28%. The fund has one and three-year returns of 13.5% and 22.5%, respectively. ROGSX had a Sharpe ratio of 1.58 in the last three years.

PIMCO Low Duration Income Fund Class A (PFIAX - Free Report) fund aims to maximize current income as its primary objective. The fund also aims for appreciation of capital in the long run. PFIAX invests a minimum of 65% of its assets in multi-sector portfolio of fixed income securities whose duration varies from 0 to 3 years.

This Sector – Govt Mtge-Short product has a history of positive total returns for over 10 years. 

PFIAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.69%, which is below the category average of 0.74%. The fund has one and three-year returns of 4.9% and 5.5%, respectively. PFIAX had a Sharpe ratio of 2.23 in the last three years.

Calvert Equity Fund Class A (CSIEX - Free Report) primarily invests its assets in equity securities of companies with market capitalization ranked among the top 1000 U.S.-listed companies. The fund mostly aims for capital appreciation. CSIEX may also invest up to 25% of its assets in U.S. dollar-denominated securities of foreign companies that trade in the United States.

This Sector- Large Cap Growth product has a history of positive total returns for more than 10 years. 

CSIEX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.99%, which is below the category average of 1.07%. The fund has one and three-year returns of 21.4% and 18.2%, respectively. CSIEX had a Sharpe ratio of 1.65 in the last three years.

Janus Global Technology T (JAGTX - Free Report) fund invests a huge portion of its assets in equity securities of those companies that are expected to gain from improvements or advancements in technology. JAGTX seeks capital appreciation for the long run and invests in both domestic and foreign companies with stable growth potential. It generally invests in companies from different nations including the United States.

This Sector - Tech product has a history of positive total returns for over 10 years.

JAGTX has a Zacks Mutual Fund Rank#1 and an annual expense ratio of 0.92%, which is below the category average of 1.28%. The fund has one and three-year returns of 13.7% and 25.1%, respectively. JAGTX had a Sharpe ratio of 1.61 in the last three years.