This past month has been a roller coaster ride for markets. Record losses in late August were immediately followed by record gains. However as Nobel Prize-winning psychologist Daniel Kahneman and many other studies have discovered, psychologically losses are twice more powerful than gains. Loss aversion is indeed what investors prefer, but the topsy-turvy scenario now has another challenge to fight – market volatility.

Record gains may take the portfolio higher, but that does not eliminate the risk of record losses as well. Playing or timing the markets amid such swings may be difficult. Along with loss aversion, investors must invest in instruments that should protect them against volatility. Here is where low-beta mutual funds come in handy.

Also known as beta coefficient, it measures the volatility of a mutual fund (considering mutual funds) in contrast to broader markets. So, it measures the extent to which a fund’s return may be affected or how much the price fluctuates owing to market conditions. Investopedia notes that “Essentially, beta expresses the fundamental tradeoff between minimizing risk and maximizing return”.

The calculation is complex though, and it is done through a statistical tool that is known as ‘regression analysis.’ Based on the number we get via this, investors can gauge the volatility of the fund.

Before we pick buy-ranked low-beta mutual funds, let’s look at the volatile run of the markets.

Volatility Index Shoots Up

The CBOE Volatility Index (VIX) proves the year’s market volatility. VIX is “a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices”. The index moves in opposite direction to market trends; it being a fear-gauge index.

VIX started the year with 17.79 and had dipped to a year-to-date low of 11.95 on Jul 17. However, VIX scaled to a high of 40.74 on Aug 24 – which marked a critical level for investors. VIX had dropped to this dangerous range during the 2008 financial crisis and also in Aug 2011 when Congress and President Obama were struggling over the debt-ceiling crisis.

The VIX had closed at 40.74 on Aug 24, skyrocketing 45.3%. VIX had hit a six and a half year peak of 53.3. This coincided with markets’ recent rout. In the previous trading session, on Aug 21, the fear-gauge index had skyrocketed 46.5% to close at 28.03. The Dow had entered correction territory on Aug 21, after declining 10.1% from its record high in May. Combined with the record losses on Aug 24, the S&P 500 also entered the correction territory, while the Dow declined to an 18-month closing low.

However, the VIX started retreating soon after as markets rebounded. In the next two sessions, VIX plunged 11.6% and 15.8%. Nonetheless, the VIX benchmark is hovering near 30, which raises caution for investors as market participants consider 20 to be a safe level. This also indicates that volatility in the market continue to remain significantly high. The 1-month change in VIX has been 103.6% and year-to-date it is up 29.69%.

More Volatility Ahead?

What is worse for investors is that volatility is predicted to continue for some more time. According to the Wells Fargo Advantage Funds chief portfolio strategist Brian Jacobsen, volatility may continue for three to four months. He says, “Sometimes the volatility is what really sticks around with us, and that could probably last anywhere from three to four months”.

China, one of the primary reasons for the market rout, cannot assure less volatility. It was the dismal economic data in the second largest economy that spooked global markets. Government measures to prop up markets had only been successful momentarily.

Recently in China, a measure of 50-day volatility increased to its highest point in 18 years. This was a result of indications that China’s government had withdrawn measures taken to prop up equity markets. However, there was another resumption of share purchases by China Securities Finance Corp, which was done to boost markets ahead of the lavish military parade to celebrate Japan's World War II surrender. So China continues to remain an uncertain territory. (Read: China Parade & Market Boost Not Enough for Funds )

Separately, the guessing game about the Federal Reserve’s rate hike will continue. While many had believed that a September rate hike was a possibility, there are also indications against it. In fact, the volatility now has emerged to be one of the prime factors working against the rate hike. Market participants and experts opine that too much volatility may stop the rate hike.

The possibility of no rate hike is also supported by historical data. In 20 years, or since 1995, there has been no rate hike if the VIX had traded at such high levels. There has been no rate hike with VIX above 25. The highest VIX has been during a rate hike was 24.34 on May 16, 2000.

Looking for Low Risk: 3 Low-Beta Funds to Buy Now

While there are generally five main indicators - alpha, beta, r-squared, standard deviation and the Sharpe ratio – for understanding investment risks, beta is the one that gives us a better understanding related to volatility, or systematic risk, of a portfolio in comparison to the broader market.

Risk-averse investors look for less volatility should choose mutual funds having a beta within 0 to 1. Funds having betas within the 0 to 1 range will experience less volatility than the broader markets. A higher beta may mean that the fund would give higher return than broader markets, but it is also applicable the other way round.

These funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). We expect the funds to outperform its 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 the likely future success of the fund.

The funds have encouraging year-to-date, 1-year and 3 and 5-year annualized returns. The minimum initial investment is within $5000. The funds also carry low expense ratio.

Fidelity Select Medical Delivery Portfolio (FSHCX - MF report) seeks long-term capital growth. FSHCX invests a major portion of its assets that are mainly involved in operations related to hospitals, nursing homes and other organizations engaged in providing health care services. FSHCX primarily focuses on acquiring common stocks of companies throughout the globe.

FSHCX currently carries a Zacks Mutual Fund Rank #2. It has a 1-year beta of 0.61 and 3-year beta of 0.46. Year to date, FSHCX has trailing return of 7.1% while that for 1 year stands at 15.7%. The 3 and 5 year annualized returns are 21.6% and 21.3%. Annual expense ratio of 0.79% is lower than the category average of 1.35%.

Oppenheimer International Small Company A (OSMAX - MF report) invests in firms that are either located or have primary operations outside the US. These companies must have market capitalization of less than $5 billion.

OSMAX currently carries a Zacks Mutual Fund Rank #1. It has a 1-year beta of 0.63 and 3-year beta of 0.73. Year to date, OSMAX has trailing return of 9.2% while that for 1 year stands at 5.4%. The 3 and 5 year annualized returns are 20.8% and 14.9%. Annual expense ratio of 1.19% is lower than the category average of 1.53%.

Matthews Japan Investor (MJFOX - MF report) invests most of its assets in preferred and common stocks of firms located in Japan. The fund may invest in companies of all sizes, but the adviser expects them to be mid to large-cap firms.

MJFOX currently carries a Zacks Mutual Fund Rank #2. It has a 1-year beta of 0.51 and 3-year beta of 0.63. Year to date, MJFOX has trailing return of 8.3% while that for 1 year stands at 2.6%. The 3 and 5 year annualized returns are 13.9% and 10.9%. Annual expense ratio of 1.03% is lower than the category average of 1.43%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank.

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