High risk investment Vs Low risk investment

High Risk Investment Vs Low Risk Investment

Before you can begin to build a successful investment portfolio, you should understand the basic elements of mutual fund investing and how they can affect the potential value of your investments over the years.

When you invest in mutual funds, there is no guarantee that you will end up with more money when you withdraw your investment than you put in to begin with -- and that's a scary prospect. Loss of value in your investment is what is considered risk in investing. Even so, the opportunity for investment growth that is possible through investments in mutual funds far exceeds that concern for most investors. Consider why.

At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the potential reward. Or stated another way, you get what you pay for and you get paid a higher return only when you're willing to accept more volatility.

Risk then, refers to the volatility -- the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors -- interest rate changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that causes investors to worry. We all fear the possibility that a stock or bond we invest in will fall substantially. But it is this very volatility in stocks, bonds and their markets that is the exact reason that you can expect to earn a higher long-term return from these investments than you can from CDs and passbook savings accounts.

Different types of mutual funds have different levels of volatility or potential price change, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. So risk has two sides: it causes the value of your investments to fluctuate, but it is precisely the reason you can expect to earn higher returns.

You might find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe havens and those simply don't pay enough to beat inflation over the long run.

Mutual fund Selection

Mutual Fund Rankings:

Mutual fund rankings, ratings or other evaluations of fund performance can provide an important way for you to compare your fund's past performance with other funds. Unfortunately, investors often interpret these rankings as recommendations, or even as projections for future performance, which they clearly are not.

Your best protection is being an informed investor. Request prospectuses from the funds you are considering and read them carefully to understand their goals, risk factors, performance record and procedures for buying and selling shares.

Professional ranking services, financial magazines and investment newsletters are the most prominent sources for this information, but there are others -- and not all present the same information or use the same criteria for evaluating funds. As an investor, you should be aware of how these reports differ and how this information can be used by you in making sound investment choices.

Rankings or ratings provide another piece of important information that can be used in the selection of fund investments, but they should not be used as the only basis for your decisions. You still need to do your homework on the funds you are considering. Identify your goals and evaluate a fund's ability to meet your goals within your investment timeframe and at the level of risk you are able to accept.

All performance rankings and ratings show how a fund has performed in the past and is no guarantee that it will continue to do so. Rankings are a good barometer, however, for determining if a fund has been well-managed over the years, or if it has consistently performed in a particular manner.

Mutual Fund Selection:

Bond Funds:

These funds are suitable for investors in medium to high tax brackets in high tax states who want income with maximum exemption from taxes.

Fixed Income Funds:

Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so.

Growth Stock Mutual funds:

They are suitable for growth-oriented investors but not investors who are unable to assume risk or who are dependent on maximizing current income from their investments.

Income Funds:

Income funds have low to moderate stability of principal and moderate potential for current income and growth. They are suitable for investors who can assume some risk to achieve growth of capital but who also want to maintain a moderate level of current income.

International Investing Mutual Funds:

While international offer opportunities for growth and diversification, this type of funds do carry some additional risks over domestic funds and should be carefully evaluated and selected according to the investor's objectives, timeframe and risk profile. Because most international funds are considered to be growth stock mutual funds, investors must be willing to assume the risk of potential loss in value in the hope of achieving substantial gains.

Money Market Mutual Funds:

Money market Mutual funds are suitable for conservative investors who want high stability of principal and moderate current income with immediate liquidity.

Sector Funds:

Sector funds are suitable for investors seeking to invest in a particular industry who can monitor industry performance regularly and alter investment strategies accordingly.

Income funds

Sector Funds

These funds invest in securities of a specific industry or sector of the economy such as health care, high technology, leisure, utilities or precious metals.

Because such funds invest primarily in one sector, they do not offer the element of downside risk protection found in mutual funds that invest in a broad range of industries. However, the funds do enable investors to diversify holdings among many companies within an industry, a more conservative approach than investing directly in one particular company.

Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in favor" but also entail the risk of capital losses when the industry is out of favor.

While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly-diversified portfolio and attempt to mirror the performance of various market averages.

Mutual Fund Selection:

Sector funds are suitable for investors seeking to invest in a particular industry who can monitor industry performance regularly and alter investment strategies accordingly.

Sector funds

Sector Funds

These funds invest in securities of a specific industry or sector of the economy such as health care, high technology, leisure, utilities or precious metals.


Because such funds invest primarily in one sector, they do not offer the element of downside risk protection found in mutual funds that invest in a broad range of industries. However, the funds do enable investors to diversify holdings among many companies within an industry, a more conservative approach than investing directly in one particular company.

Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in favor" but also entail the risk of capital losses when the industry is out of favor.


While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly-diversified portfolio and attempt to mirror the performance of various market averages.

Mutual Fund Selection:

Sector funds are suitable for investors seeking to invest in a particular industry who can monitor industry performance regularly and alter investment strategies accordingly.

Bond funds

Bond funds:

These bond funds provide the investor with an even greater tax advantage by investing in municipal bonds of a single state. Triple tax-exempt funds are exempt from income tax in a specific city. Thus they generate income exempt from not only federal income tax but also from state and/or city income tax for residents of those jurisdictions. Like all bond funds, the value of the shares will fluctuate with interest rates, as will the current yield. Also, the stability of principal and yield levels vary with the quality and maturity length of the bonds in which the funds invest. Lack of geographic diversification increases credit risk of these funds compared with national funds.

Mutual Fund Selection:

These funds are suitable for investors in medium to high tax brackets in high tax states who want income with maximum exemption from taxes.

Fixed income funds

Fixed Income Funds:

The goal of fixed income funds is to provide high current income consistent with the preservation of capital. Growth of capital is of secondary importance.

Income funds that invest primarily in common stocks are classified as equity income funds (see next listing). Those that invest primarily in bonds and preferred stocks are classified as fixed-income funds. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return.

Since bond prices fluctuate with changing interest rates, there is some risk involved despite the fund's conservative nature. When interest rates rise, the market price of fixed-income securities declines and so will the value of the income funds' investments. Conversely, in periods of declining interest rates, the value of fixed-income funds will rise and investors will enjoy capital appreciation as well as income.


Fixed-income funds offer a higher level of current income than money market funds, but a lower stability of principal. They are generally more stable in price than funds that invest in stocks. Within the fixed-income category, funds vary greatly in their stability of principal and in their dividend yields. High-yield funds, which seek to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities.

Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely payment of interest and principal is backed by the full faith and credit of the U.S. Government. These include securities issued by the U.S. Treasury, the Government National Mortgage Association ("Ginnie Mae" securities), the Federal National Mortgage Association ("Fannie Maes") and Federal Home Loan Mortgage Corporation ("Freddie Macs"). All are backed by pools of mortgages

Mutual Funds selection:

Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so.

Money market mutual funds

Money market Mutual Funds:

For the cautious investor, these funds provide a very high stability of principal while seeking a moderate to high current income. They invest in highly-liquid, virtually risk-free, short-term debt securities of agencies of the U.S. Government, banks and corporations and U.S. Treasury Bills. They have no potential for capital appreciation.

Tax-exempt money market mutual funds invest in securities that provide safety of principal, liquidity and income exempt from federal income taxes by investing in short-term, high-rated municipal obligations.

Because of their short-term investments, money market mutual funds are able to keep a constant share price; only the yield fluctuates. Therefore, they are an attractive alternative to bank accounts. With yields that are generally competitive with -- and usually somewhat higher than -- yields on bank certificates of deposit (CDs), they offer several advantages:

• Money can be withdrawn any time without penalty. Money market funds also offer check writing privileges.
  

• Although not insured by the FDIC or FSLIC, money market funds invest only in highly-liquid, short-term, top-rated money market instruments.

Mutual fund Selection:

Money market funds are suitable for conservative investors who want high stability of principal and moderate current income with immediate liquidity.