The Best Mutual Funds for Conservative Investors

While some investors are focused on nothing but chasing yield, conservative investors look at different metrics. With a conservative portfolio, you're giving up higher potential yield in exchange for greater security. That security comes in the form of lower volatility, a different mix of growth and income-producing assets and different choices of investments that make up the fund.

Stocks

Conservative mutual funds typically hold stock in larger, more stable companies. You're more likely to find a Dow component in one of these funds than you are the latest nanotechnology firm from Brazil. These funds frequently have a heavier focus on stocks that pay dividends, as well, since dividends provide a bankable cash component to a fund's returns.

Bonds

Many conservative mutual funds include bonds in their portfolio. Typically more conservative investments than stocks, bonds are also useful hedges against the stock market since their prices usually move in the opposite direction of stock prices. Managers of conservative mutual funds also pay careful attention to the duration of the bonds they hold, minimizing their exposure to price fluctuations caused by changes in interest rates.

Volatility

One of the advantages of buying a conservative fund is that you probably won't have to watch its price jump up and down. Conservative mutual funds have lower price volatility. If the price moves less, your market risk is reduced. For instance, a mutual fund with a price of $100 per share and 25 percent annual volatility could trade anywhere between $75 and $125, while one with 8 percent volatility stays in a range from $92 to $108. The latter fund, which would be relatively conservative, is safer because there's less downside risk. Even if you had to sell it on the worst day of the year, you'd only be down $8 from its average price instead of being down up to $25 with the more volatile fund.

Fees

While controlling investment management fees is always a good way to increase returns, it's even more important with conservative mutual funds. If you have an investment that returns 11 percent, and 1 percent of that goes to fees, you'll still have a 10 percent return, which is 91 percent of its total return. That same 1 percent fee applied against a 7 percent return leaves you with 6 percent -- only 86 percent of what you would have gotten without a fee. As such, finding a conservative fund with lower management fees will leave higher returns for you. Many companies offer conservative funds with fees under one-half of 1 percent.