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What are the risks involved in investments in mutual funds?
July 30, 2010 | 1 Comment
People are advised to invest in mutual funds depending on their "risk appetite". As a beginner I need to understand what is implied here and how does one assess risks involved in such investments. How should one choose funds which will minimize risks but give reasonably good return? It seems some comprise has to be made, but how? Kindly explain in some detail as I am new in this area. Thanks in advance.
Comments
1 Comment so far
It is great that you want to educate yourself before "diving in." However, there is more to learn than anyone can impart here on Y!A. I would highly recommend heading down to your library or book store and picking up one or two books on mutual fund basics. "Mutual Funds for Dummies" is a good one, as is "Bogle on Mutual Funds." It’s really not all that complicated, but this is VERY important stuff to know.
Regarding your question, you are correct, in general. One of the key concepts in investing is the risk/reward spectrum. The more short-term volatility/risk you are willing to take on, the greater your expected long-term returns. For example, one of the "safest" investments right now is a bank or credit union CD. You are guaranteed not to lose any money, but those are only paying around 1-2% annually (depending on the term). Stock mutual funds are volatile – their values go up and down over the short term, and historically they have lost money in about 1 out of every three years. However, over the long-term, they have historically done very well, averaging about 8-10% annually over the last 100 years or so.
I hope that helps. Good luck!