Mutual fund buyers care about investment risk, a survey by the Investment Company Institute shows. But there's wide variation in their concepts of what risk is, the researchers concluded.
Two-thirds of respondents said they had mulled over risk before buying shares in a stock or bond mutual fund. Indeed, they said that when they bought long-term funds, risk trailed only performance, which three-quarters considered.
Most of the respondents showed a good grip on what mutual fund risk means. Asked to describe it in their own words, more than half said it was the chance of a net loss. Twenty-six percent spoke of the chance of making money versus the chance of losing it, and 7% equated risk with market volatility. Two percent said risk was not achieving their financial goals.
Eighty-four percent used more than one such concept.
The importance of risk and the slipperiness of the concept underscore the challenge mutual fund executives and regulators face in properly explaining it in marketing and legal materials.
Risk handily surpassed consideration of investment goals, which only half the 657 consumers surveyed said they had considered before buying shares. And that disparity worried one bank executive.
The ICI study examined how investors would like to learn about risk. Not surprisingly, most had not used and were not especially interested in quantitative risk measures, such as standard deviation. Fewer than one- third said standard deviation would cause them to be "very confident" in picking funds.
Both narrative descriptions and bar charts of annual returns appealed to about half the respondents as a means of assessing risk before buying.
But some experts doubt that a prospectus could adequately educate investors.
"Even if investors understand risk intellectually, I don't know if they understand it emotionally," said William G. Papesh, president of Composite Research & Management Co., the proprietary fund unit at Washington Mutual Inc., Seattle. "If they don't, they'll have a tendency to liquidate in down markets," when they should be holding on or even buying, he said.