Mutual funds with high risk vs. low risk - Which to Choose (2024)

FAQs

Why might you choose an investment with high-risk instead of one with low risk responses? ›

High-risk investments may offer the chance of higher returns than other investments might produce, but they put your money at higher risk. This means that if things go well, high-risk investments can produce high returns.

The Difference Between High- and Low-Risk Investments

Low-risk investments give lower returns, but losses are also rare. High-risk investments have the potential for high returns, but these returns are not guaranteed.

Opportunity for growth: Investors with a longer investment horizon may benefit from high-risk mutual funds as they have more time to ride out market fluctuations and benefit from compounding returns. These funds can be suitable for investors seeking growth and willing to tolerate short-term fluctuations in value.

At the low-risk end of the spectrum are basic investments such as Certificates of Deposit (CDs); bonds or fixed-income instruments are higher up on the risk scale, while stocks or equities are regarded as riskier. Commodities and derivatives are generally considered to be among the riskiest investments.

Low-risk investing not only means protecting against the chance of any loss, but it also means making sure that none of the potential losses will be devastating.

Investing is all about how willing you are to withstand the volatility of the market. The greater risk you take, the greater earnings you have the potential to receive over time.

Low-risk investing involves buying assets that have a low probability of incurring losses. While you're less likely to see losses with a low-risk investment, you're also less likely to earn a significant return.

In general, the shorter your investment horizon (i.e., the sooner you need the money) the less risky you want your investments to be. If your horizon is longer than 10 years, relatively higher-risk investments that offer the potential for higher returns, such as stocks, may be a consideration.

Funds with the lowest risk profile are the least volatile and funds with the highest risk are the most volatile. If you're a cautious investor, you may only want to take a small amount of risk to try and achieve a modest and relatively stable return. If so, funds with a low risk profile could be right for you.

To choose a mutual fund, define your investment objectives (e.g., retirement, education, wealth creation), choose a fund category (equity, debt, hybrid) based on your risk appetite, and evaluate historical returns, expense ratios, and fund managers.

What is the biggest risk for mutual funds? ›

Inflation is the biggest risk which eats up the returns generated by your investments in mutual funds. If your investments are not generating higher returns than the prevailing inflation rate, then you are just losing money from your investment.

Sectoral funds: These are the riskiest category of equity mutual funds which invest a minimum of 80% of their portfolio in companies belonging to the same sector. Low diversification adds to their overall risk with returns dependent on the performance of a single sector.

Equities are generally considered the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the successes and failures of private businesses in a fiercely competitive marketplace. Equity investing involves buying stock in a private company or group of companies.

High-risk investments include currency trading, REITs, and initial public offerings (IPOs).

What is the difference between low-risk and high-risk investments? Low-risk investments, such as bonds and savings accounts, tend to have lower returns but also lower volatility. High-risk investments, such as stocks and real estate, tend to have higher returns but also higher volatility.

What is Risk Averse. Definition: A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks.

Avoiding involves eliminating the risk or its causes, or changing the plan to avoid the risk exposure. This is an effective strategy for high-impact and high-probability risks, but it may require significant changes in scope, schedule, cost, or quality.

The biggest difference between saving and investing is the level of risk taken. Saving typically results in you earning a lower return but with virtually no risk. In contrast, investing allows you the opportunity to earn a higher return, but you take on the risk of loss in order to do so.