Investors invest money to make a positive return. The most popular investment vehicle to achieve this would be mutual funds. More and more investors are going into mutual funds because most of the funds (not all) outperform the market almost every year. There are many mutual funds and each of them have their own risk level.
If you are someone who likes to play it safe, go for low risk mutual funds. If you like high risk high return, go for high risk or more aggressive funds. Mutual fund are safe if we know what, where and why we invest in them. Let us show you what we mean by low, moderate, and high risk funds.
What type of mutual funds are suitable for me?
Low Risk
Money Market Funds
Money market funds invest in low risk vehicles such as certificates of deposit (CDs), Treasury bills and short-term commercial paper. It usually has a low single-digit return. Money market funds are highly liquid (easy to withdraw during emergency) because they trade securities that are in fairly high demand (a lot of people want to buy at anytime).
Be aware that the return may be lower than the inflation rate, which means your cost of living may go up faster than your returns come in. Most money market accounts have annual fees, which could affect your profit. Riskier investments have much better returns than money market funds. You might miss better opportunities if you put everything into money market funds.
Money market fund will be suitable for those who like to grow their emergency fund without risking their principal. It is a safe place to park your cash in the short-term.
Fixed income funds
The objective of this fund is to provide regular income to investors. It is not focused on capital growth. Fixed income funds invest in vehicles like corporate bonds, government securities, and also money market instrument. This would be the recommended fund for those who want safe and regular income. If you’re in your 30s, best not to throw all your money into here. You may lose out to inflation, just like money market funds.
This is a good place to put your money if you expect the economy to crash. When the economy goes down, the interest rate goes down, and bond prices go up.
Moderate Risk
Balanced Fund
Balanced fund adopts a general strategy of investing in fixed income and equities by achieving the good balance of safety, income and capital appreciation. It is a more diversified fund. Investors are exposed to the high risk stock but a portion of the fund will be allocated to low risk debt securities like bonds. Balanced funds usually allocate 40% into fixed income and 60% of the investment into equities.
First time equity investor will be recommended for this fund as they will get a taste of investing in stocks while still controlling their risk. Besides that, balanced fund is a great opportunity for conservative investors to explore slightly riskier investment with higher returns.
High Risk
Global/International equity funds
Global/ International equity funds diversifies its risk by investing in different markets which can help to reduce country specific risks.
Global equity funds invest in different countries included home country.
International equity funds only invest in others countries.
This type of fund is suitable for investors who wish to try high risk investment but want to avoid specific market risks. These funds have potential for rapid growth by offering great options for tapping into other countries.
Equity Funds
High risk, high return. Equity funds carry high risk because they invest everything into the equity market. Different equity funds come with different levels of risk but should always be treated as a risky investment. This is suitable for investors with high risk tolerance and seek aggressive capital appreciation.
Conclusion
Mutual funds are a safe way to invest to get good returns, if you know what you are doing. Understand the risks of different funds and know your own timeframe (how long you plan to invest). If you allocate your money well, you would effectively diversify the risk and achieve your financial goal in the near future. Get advice from our consultants or check out our Money Tree.
“Risk comes from not knowing what you are doing” – Warren Buffett.
