Risk analysis of my Mutual Fund Investments (Beta Coefficient)


I recently wrote about my plan to prepare for the next recession which, in my opinion, is due soon. While thinking about that, a question that came to my mind was: how will my mutual fund portfolio deal with the upcoming recession? To answer that, I wanted to do a risk analysis of the mutual funds that I am using to generate Passive Income Streams. I wrote about my implementation of passive income streams here.

The mutual funds and/or cash driving my passive income streams are listed below for reference. Before I do a risk analysis of my portfolio, we need to understand some terminologies. Lets dive into that next.

Investment Vehicles (Last Updated on 10/18/2014)
Risk Bucket Name Investment Vehicle 1 Investment Vehicle 2
Risk 1 (Cash in banks) Smarty Pig (online) Credit Union (brick & mortar)
Risk 2 (Bonds) VCAIX (ca munis) N/A
Risk 3 (Balanced Funds) VTMFX (has natl munis) N/A
Risk 4 (Dividend Investing) VDIGX (div growth) VHDYX (high curr div)
Risk 5 (Capital Growth) VTCLX (large+mid cap) VTMSX (small cap)
Risk 5 (International Funds) VTMGX (large blend) N/A


Risk of a mutual fund

When we talk about the risk analysis of a mutual fund OR the volatility of a mutual fund, we often compare it to the market as a whole. For example, if the market goes through a volatile phase, will the mutual fund also be volatile OR will it be stable OR will it reach inversely to the market?

Consider one example. In a recession OR a down market, most people will conserve money and not buy new cars. Most people will repair their current cars and postpone purchase of a new car to when the market is up.

  • If you own stocks of companies that manufacture new cars, when the market goes down, such stocks will also go down.
    • Greater risk in a down market, but greater reward in an up market
  • If you own stocks of companies that manufacture automotive replacement parts, then when the market goes down, replacement parts companies make money and hence such stocks will go up.
    • Greater risk in an up market, but greater reward in a down market.
  • If you own stocks of companies that provide water supply to people, such stocks remain calm when the market goes up or down.
    • Low risk, Low reward.

A metric used by many investors to compare a mutual fund/stock/portfolio to the entire market is called the Beta Coefficient.

Beta Coefficient

If you had asked me last year, I would have said that “beta coefficient” looks like a very geeky mathematical name i.e. something I had ignored often as too complicated. It is complicated math but I have found a nice and easy way to understand it. Lets define it my way.

Beta Coefficient of a mutual fund/stock/portfolio is a measure of the risk that shows up when the mutual fund/stock/portfolio is exposed to different types of market conditions like an up market, down market, recession, etc. 

Some common values of Beta Coefficient will help make it clearer:

  • A beta of less than 1 means that the mutual fund/stock/portfolio will be less volatile than the market.
    • The water company example above
  • A beta of greater than 1 indicates that the price of the mutual fund/stock/portfolio will be more volatile than the market.
    • If a stock’s beta is 1.5, it’s theoretically 50% more volatile than the market.
    • For example, the new car company stocks.
  • A negative beta indicates a counter-cyclical sector that moves inversely with the broader market.
    • The replacement auto parts company example.

My portfolio’s Beta Coefficient

I gave the search “VCADX beta coefficient” on google and google finance displays the beta coefficient for VCADX so easily that I repeated the same procedure for the remaining mutual funds in my portfolio and here are two tables.

Table 1: Income Portfolio

  • Mutual funds that primarily generate dividends, capital appreciation is secondary
  • 64% of my passive income streams portfolio is in this category
Beta Coefficient of my Income portfolio (updated 03/31/2015)
Investment Vehicle 1 year Beta 3 year Beta 5 year Beta 10 year Beta
VCADX (CA Munis) 0.93 0.93 0.96 0.93
VTMFX (Balanced fund) 0.69 0.73 0.72 0.76
VDIGX (Dividend Growth) 0.87 0.90 0.81 0.80
VHDYX (Current Dividend) 0.93 0.92 0.84 n/a
Average 0.86 0.87 0.83 0.83


Table 2: Capital Appreciation Portfolio

  • Mutual funds that primarily invest for capital appreciation, any dividends are secondary.
  • 36% of my passive income streams portfolio is in this category
Beta Coefficient of my Capital Appreciation portfolio (updated 03/31/2015)
Investment Vehicle 1 year Beta 3 year Beta 5 year Beta 10 year Beta
VTCLX (Capital Appreciation) 1.04 1.02 1.04 1.03
VTMSX (Small Cap) 1.32 1.13 1.19 1.18
VTMGX (International) 0.99 1.03 1.02 0.97
Average 1.12 1.06 1.08 1.06


Consider the Average beta values for both the income and cap appreciation portfolios:

  • Income portfolio
    • Average beta is less than 1 => my Income portfolio will be less volatile than the market.
  • Capital Appreciation portfolio
    • Average beta is greater than 1 => my Capital appreciation portfolio will be more volatile than the market.

Based on the above numbers, I can conclude that when the next recession comes, my Income Portfolio should continue to generate approximately the same amount of income (give or take a few percent) because it is less volatile OR less risky that the overall market.



5 thoughts on “Risk analysis of my Mutual Fund Investments (Beta Coefficient)

  1. CA means california munis? I’ve heard for a long long time some of the counties and cities might default. So in 2008,2009 I bought some other States instead of ÇA. Over the years, I’ve only heard two county that collapsed, on was Orange County, and the other was the one where McDonald was found. Forgot the names. I’m surprised by the consistent beta 0.93

    As the rate increases, there will be pull back from growth. Thanks for sharing about beta coefficient.


  2. Thanks for dropping by!

    Yes. For almost a year or so, I stayed away from investing in MUNIs (not just CA) because of the fear of defaults. Prime example was the Detroit muni defaults. But, then I desperately needed a tax shelter…no mortgage you see 😦 So, I studied the bond mix of VCADX

    The bond quality mix of VCADX is as follows:
    AAA 9.5%
    AA 72.2%
    A 12.1%
    BBB 4.8%
    BB 0.1%
    B or Lower 0.3%
    NR 1.0%
    Total 100.0%

    A majority of the bonds are AAA, AA and A. If there is a default, then it will be most probably from the remaining 7% or so of bonds rated BBB and lower. I am willing to take this risk…a lot of things have to go wrong for all the municipalities in CA to default and probability of such an event is low.

    I do hedge my bets by investing in National MUNIs as well…I thought of doing it directly, but since 50% of VTMFX (balanced fund) is National MUNIs, I decided to deploy the money elsewhere like small cap, and international funds.


  3. I do hope your income portfolio will succeed, come the next recession. I don’t really see one happening soon though, despite what many people are saying. The US market is overvalued, but not to anywhere near the crazy extent like it was in 1999.

    I think you’ve got a sensible plan, given the lack of mortgage situation.



  4. hey Humble FI,

    This is an interesting way to look at mutual funds. I have quite a few of them as well. It might be a nice exercise to do. I am curious what the outcome will be. The goal of that mutual fund portfolio is to be less volatile than the market (and having then a lower return). The portfolio did good in 2008.

    I wish you the best for the next 10/15 years

    Amber Tree

    Liked by 1 person

  5. Pingback: VDIGX….an investment decision validated. | Humble FI

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