Understanding R-Squared: Assessing Mutual Fund Risk & Performance

Looking at the r-squared value of a mutual fund can provide investors with a lot of valuable information that they can use for investment decisions. The r-squared value of an investment is one of the most common metrics of comparison available in the market. Here are the basics of the r-squared value and what it means to you as an investor.

What is R-Squared?

In order to understand the importance of this value, you need understand what it represents. The r-squared value is a number that will range from 0 to 100. This number tells you how much of a security's movement can be accounted for by the movement of the index that it is a part of.

The higher the value, the more correlated it is to the index. A number between 80 and 100 represents a very high correlation to the index. Anything less than 70, tells you that the security does not tend to move with the index.

Mutual Fund Risk

When investing in mutual funds, you want to pay special attention to this value. The more correlated than it is to the index, the less volatile it will be. If you want steady growth in your mutual fund over a long period of time, look for mutual funds with a high r-squared value.