Markets suffered heavily in the past few sessions amid concerns over a “Brexit” possibility and rate hike uncertainty. While the Dow (DIA) and the S&P 500 (SPY) witnessed a five-day losing streak for the first time since early February on Wednesday, the Nasdaq registered identical losses for the first time since early April. Meanwhile, the fear-gauge VOLATILITY S&P 500 surged 29.5% over the past five sessions.

Against this uncertain backdrop, the addition of low-risk mutual funds to one’s portfolio may prove prudent investments. 

“Brexit” Concern

Concerns over an increasing possibility of “Brexit” emerged as one of the major reasons for the rising uncertainty in financial markets. Recently released polls signaled that a growing number of British citizens are favoring the country’s separation from the European Union (EU), as Jun 23 is approaching. The new YouGov poll for the Times showed those in favor of a Brexit rising to 46% while those against such a move falling to 39%. The undecided accounted for 11% of the sample population while 4% had decided not to vote. (Read: 5 British Stocks to Watch as Brexit Vote Looms)

Results from the same poll released last week showed that those in favor of staying within the EU were 1%. The polls have raised the possibility that Britain may opt for an exit from the EU in the Jun 23 referendum. Investors are speculating that “Brexit” will have a significant effect on global financial markets, which may lead to rising uncertainty.

Uncertainty Over Rate Hike Timing

After concluding its two-day policy meeting on Wednesday, the Federal Open Market Committee (FOMC) decided to keep the federal funds rate unchanged between 0.25% and 0.5% following concerns regarding weak jobs data. The FOMC stated: “The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished.” Also the Fed chairwoman Janet Yellen said that “Brexit” is likely to have "consequences for economic and financial conditions in global financial markets."

Meanwhile, the Fed’s decision to stick with its 2016 rate hike plan also appears to be on shaky ground with just six of the 17 policymakers forecasting one rate hike this year, compared to only one Fed official take a similar view in March. Yellen said: "I'm not comfortable to say it's in the next meeting or two, but it could be…It's not impossible that by July, for example, we would see data that led us to believe that we are in a perfectly fine course."

How to Identify Low-Risk Funds?

Before selecting funds, it is important to identify appropriate indicators that can effectively measure the risk level of a fund. This is the reason why, we have used both beta and Sharpe ratios to screen low risk mutual funds. While beta gives us a better understanding of volatility, or systematic risk, of a portfolio in comparison to the broader market, Sharpe ratio measures a fund’s average return relative to the level of volatility experienced by the same.

Risk-averse investors looking for less volatility should choose mutual funds having a beta within 0 to 1. Funds having beta within the 0 to 1 range will experience less volatility than the broader markets. Meanwhile, Sharpe ratio indicates how much extra return one can derive from a portfolio by taking additional risk.

This means that the higher the Sharpe ratio, the more attractive will be the fund among risk-averse investors. Now, in terms of an ideal Sharpe ratio, most investors think mutual funds with a Sharpe ratio higher than 1 are good investment options. (Read: 4 Top-Ranked Mutual Funds with a Good Sharpe Ratio)

4 Funds to Buy

We have selected four mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy) and have 3-year beta and Sharpe ratio less than 1 and greater than 1, respectively. 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.

Moreover, these funds have encouraging year-to-date, three-year and five-year annualized returns. They also have minimum initial investment within $5000, low expense ratios and no sales load.

American Century Equity Income Investor (TWEIX - MF report) focuses on acquiring securities of companies that are believed to be undervalued and have a strong record of income payments. This Zacks Mutual Fund Rank #1 has 3-year beta and Sharpe ratios of 0.66 and 1.25, respectively. Annual expense ratio of 0.94% is lower than the category average of 1.10%. TWEIX has year-to-date, three-year and five-year annualized returns of 9.9%, 9.8% and 11.1%, respectively.

Invesco Diversified Dividend Y (LCEYX - MF report) invests in securities of dividend paying companies and may also invest not more than 25% of its assets in securities of non-U.S. companies. This Zacks Mutual Fund Rank #1 has 3-year beta and Sharpe ratios of 0.74 and 1.27, respectively. Annual expense ratio of 0.57% is lower than the category average of 1.10%. LAMFX has year-to-date, three-year and five-year annualized returns of 9.1%, 10.4% and 11.2%, respectively.

Lord Abbett Calibrated Dividend Growth F (LAMFX - MF report) invests in securities of S&P 500 companies that are believed to provide healthy dividend income.This Zacks Mutual Fund Rank #1 has 3-year beta and Sharpe ratios of 0.91 and 1.02, respectively. Annual expense ratio of 0.70% is lower than the category average of 1.02%. LAMFX has year-to-date, three-year and five-year annualized returns of 6.8%, 11.1% and 12.8%, respectively.

Fidelity Telecom and Utilities (FIUIX - MF report) invests a large portion of its assets in securities of telecommunications’ services companies and utility companies. This Zacks Mutual Fund Rank #2 has 3-year beta and Sharpe ratios of 0.63 and 1.12, respectively. Annual expense ratio of 0.74% is lower than the category average of 1.15%. FIUIX has year-to-date, three-year and five-year annualized returns of 15.2%, 11% and 11.4%, respectively.