Low Risk Vs High Risk Equity Funds (2024)

FAQs

Is it better to invest in high risk or low-risk? ›

High-risk investments offer the prospect of returns that are potentially more attractive than those available from mainstream investments. But there's no guarantee that high-risk investments will actually deliver high returns. In practice, the actual returns could be below those of mainstream investments.

Equity Mutual Funds as a category are considered 'High Risk' investment products. While all equity funds are exposed to market risks, the degree of risk varies from fund to fund and depends on the type of equity fund.

If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents.

2. 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.

Certificates of deposit (CDs) are a very safe place for your retirement money. For starters, they are FDIC insured (as long as you take them out from an FDIC member bank), so your money is protected up to $250,000 per account holder per bank. CDs are also a good option for earning a high annual percentage yield (APY).

Most sources cite a low-risk portfolio as being made up of 15-40% equities. Medium risk ranges from 40-60%. High risk is generally from 70% upwards. In all cases, the remainder of the portfolio is made up of lower-risk asset classes such as bonds, money market funds, property funds and cash.

Money market mutual funds = lowest returns, lowest risk

They are considered one of the safest investments you can make. Money market funds are used by investors who want to protect their retirement savings but still earn some interest — often between 1% and 3% a year. (Learn more about money market funds.)

The higher the equity risk premium, the more you will earn from investing in stocks than you would by investing in risk-free assets. This makes investing in stocks more enticing; however, since the equity risk premium is based on historical data, the 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.

Are mutual funds high or low risk? ›

Because most mutual funds offer a level of built-in diversification, they're typically considered a lower risk investment. However, as with all investments, there are still risks involved, and mutual fund returns aren't guaranteed.

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

The risk/return ratio helps investors assess whether a potential investment is worth making. A lower ratio means that the potential reward is greater than the potential risk, while a high ratio means the opposite.

Low-Risk Investment

There is also less to gain—either in terms of the potential return or the potential benefit bigger term. 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.

Balance Risk by Diversifying Your Portfolio

By investing in different types of assets, you can lower the overall risk of your portfolio and reduce the impact of market volatility. Consider investing in stocks, bonds, real estate, and other assets to spread the risk across different asset classes.

If you opt for only low-risk investments, you're likely to lose purchasing power over time. It's also why low-risk plays make for better short-term investments or a stash for your emergency fund. In contrast, higher-risk investments are better suited for long-term goals.

For a given portfolio volatility, the higher the value at risk, the less the concern. Losses of less than the VaR amount are common occurrences, you can predict what will happen. Losses of greater than VaR are rarer; these are the days when unexpected things can occur.

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.