After a nice rally in the opening months of the year, the stock market appears to have taken a spring vacation as worries over the situation in Europe and softer economic data here at home have weighed on investors' psyches. The broad market is down more than 6% from its peak earlier this year, and with the alarm bells blaring over potential dangers overseas and fear and uncertainty taking hold again, stocks could have a lot farther to fall.

But dumping stocks isn't the answer. History has shown time and time again that the vast majority of investors are poor market timers, and that you're more likely to end up losing money following such a strategy.

However, there are steps you can take now to reduce risk in your portfolio while still maintaining the equity allocation that you've already determined is right for you. Below, I'll highlight three first-rate mutual funds with low downside capture ratios, which means the fund holds up better than the broader market in down periods. Embracing funds like these should limit your downside exposure while still allowing for meaningful participation in any market rallies.

Neuberger Berman Genesis (NBGNX)
It's no secret that small- and mid-cap stocks have had the upper hand over larger stocks in recent history. And while large caps are due for their day in the sun, long-term investors should always maintain a foot in the small-fry market. This fund allows investors to do just that while keeping risk to a minimum. According to Morningstar data, over the past 10-year period, Genesis has generated a 85.3% downside capture ratio, which means that when the market fell by 10%, the fund only dropped 8.5%. Impressively, the fund has managed that feat while also capturing more gains than the broader market over that time period, as indicated by its 105.9% upside capture ratio (meaning when the market rose 10%, the fund was up 10.6%).

Management here looks for reasonably priced smaller companies with strong free cash flow, healthy balance sheets, and competitive market positioning. Lately, the team has been favoring companies that benefit directly or indirectly from growth in emerging markets, since growth in debt-laden areas like the U.S. and Europe is likely to be constrained. For example, the fund owns mineral and fertilizer producer Compass Minerals (NYSE: CMP) and irrigation products maker Valmont Industries (NYSE: VMI), both of which it sees benefiting from increasing food and water demands from growing emerging nations. If you want a solid small- to mid-cap fund that won't put your capital at excess risk, consider adding Neuberger Berman Genesis to your fund line-up.

T. Rowe Price Health Sciences (PRHSX)
Investors willing to take a more focused approach to equity investing might want to consider this T. Rowe fund, which invests in companies in the health-care, medicine, and life sciences industries. Manager Kris Jenner has been in charge here for more than 12 years and in that time has guided the fund to an annualized 10.8% gain, compared to a 6.9% showing for the average health-care fund. Over the most recent decade, the fund has managed to capture 87% of the market's upside while only losing 57.1% as much as the market in downturns. This fund is a solid downside protector thanks to the health-care sector's generally low beta as well as some skilled stock picking.

While many health-care funds focus on the larger end of the market cap spectrum, Jenner tends to fish in more small- and mid-cap waters, as evidenced by the fund's $6.9 billion geometric average market capitalization. However, some slightly larger names do make it into the portfolio, such as top holding Alexion Pharmaceuticals (Nasdaq: ALXN). Alexion markets the drug Solaris, which is one of the only treatments available for a very rare blood disease. The drug's near monopoly on treatment has translated into fat profit margins for Alexion, whose stock has nearly doubled in the past year. While investors should use sector-specific funds like this sparingly, T. Rowe Price Health Sciences is a great choice for managing downside volatility in your portfolio.

Yacktman (YACKX)
This fund tends to be bit more focused in nature, which means that stock selection has an outsized effect on returns. Fortunately for shareholders, management has been right on track, here. The team in charge looks for high-quality companies that are trading at substantial discounts to intrinsic value. Consumer staples stocks take up a large chunk of assets, which helps explain the fund's attractive 72.8% downside capture ratio. The team sees the current economic environment as one containing many risks, which is why they favor more defensive consumer plays Procter & Gamble (NYSE: PG) and Coca-Cola (NYSE: KO), which offer the predictability, quality, and valuations that management feels are important in such times.

But don't go thinking that this fund can only play a good defense -- the fund has captured 101.3% of the market's upside in positive environments over the past decade. In addition, over the most recent 15-year period, the fund has churned out an annualized 8.7% return, landing it in the top 1% of all large-cap value funds. Yacktman may not always look as good as it does right now, but long-term investors who want solid returns with a hefty dose of downside protection should find a lot to like here.

With the November elections, trouble in Europe, and budgetary roadblocks looming ahead, odds are good that market volatility will remain elevated in the near future. Sitting out of the market probably isn't a wise choice, so instead try to manage your risk with some well-chosen funds that help limit your downside potential.

While the funds listed above can help shield your portfolio from the worst of the market's volatility, there's a lot more you need to do to ensure that you can retire on time -- or at all! Be sure to check out our newest special free report, which highlights the shocking truth about your retirement. Don't miss this chance to grab your free copy of this can't-miss report today!