How a Bond Manager Assesses Municipal Bonds Mutual Fund Risk
A bond manager will typically oversee mutual funds, which are essentially a pool of money gathered by large groups of investors, which are then allocated into all manner of investments, including stocks and municipal bonds.
In current times of perceived bond market risk, a bond manager, who is both wise and experienced, can effectively assess hazards in mutual fund investment in municipal bonds.
A bond manager will look to take advantage of the market’s imperfections by looking to five factors that are measured to determine mutual fund risk and implement yield curve strategies that create risk-adjusted investments with higher yields.
Five Municipal Bonds Mutual Fund Risk Factors
· R-Squared
Fund portfolios with values that fall in the upper bracket on a scale of 0-100 will likely behave in accordance with the benchmark index and are therefore less risky. Investors can actually save a little money by choosing to forego a bond manager in these cases.
· Alpha
Alpha is the value that a bond manager will add or subtract from a mutual fund’s return, and the price risk of a mutual fund is then assessed by being compared to a benchmark index. The alpha will indicate if the mutual fund will outperform or underperform accordingly.
· Beta
The beta measures the systematic risk of a mutual fund in order to determine volatility compared to the market. Lower betas (those that fall below the market’s 1.0) are considered to be more ideal.
· Standard Deviation
Although it can be said that the past performance of a mutual fund may not be the most reliable of factors for determining risk, the standard deviation does help to measure the return of a mutual fund based on history. If a fund portfolio has a higher standard of deviation, the returns are in turn deviating more significantly. Once the standard deviation has been determined, a bond manager can further assess an investment’s risk by calculating the Sharpe ratio.
· Sharpe Ratio
The difference between the risk-free rate of return, and the portfolio’s rate of return, are calculated and then divided by the standard deviation. In this case, the higher the Sharpe ratio, the less risk involved in an investment.
Investors in Municipal Bonds Now Crave Higher Risks and Yields
As the economy has more recently been perceived to be improving, there actually appears to be less money going into municipal bonds mutual funds. Investors are now seemingly looking to higher risk and yield investments for greater returns. Fortunately, the demand for municipal bonds still remains strong and mutual funds can still offer the higher yields that investors currently appear to be craving.