When you’re investing in a mutual fund, it’s important to know what kind of risk you are taking on. Your mutual fund risk level is directly related to how likely your fund is to lose money. The higher the risk, the faster your potential return on investment could be, but that also means a greater possibility of losing money. If you don’t understand how risk works and what its implications are for your investment portfolio, then you might end up making some risky decisions that cost you significantly. Understanding the three types of risks your funds can take will help you stay informed about which investments make sense for you and which do not. Read on to find out more about the different kinds of risks and what each one means for your financial situation.

Understanding Mutual Fund Risk Level

If you don’t understand what risk is, that could spell serious trouble for your financial future. When you’re trying to understand the different types of risks your funds could take, it’s helpful to first understand what the term risk actually means. Risk is the chance that your investment could lose money. The greater the chance that you could lose money on an investment, the riskier that investment is. This means that there are different types of risk, each of which has a different likelihood of happening and a different potential outcome. Here are some of the most common types of investment risk you’ll encounter as you shop around for funds.

High-Risk Mutual Funds

If you want to make the most money with your investments, you might want to consider a high-risk mutual fund. These kinds of funds take on a high risk of loss with the hope of gaining a high return at the same time. They’re typically associated with stocks and other highly volatile assets. In order to make money, high-risk funds must consistently outperform the market. If they do not, then you could lose a lot of money. High-risk funds are not necessarily mutual funds, but they often are. These funds may also be called aggressive funds or aggressive growth funds. They usually have high expected returns and high volatility.

Medium Risk Mutual Funds

If you’ve decided that you want to invest in a medium-risk mutual fund, you may be looking to preserve your assets and earn a modest return over time. These funds typically invest in less volatile assets, such as bonds and cash. They do not seek to outperform the market but instead track it and aim to deliver a modest return over time. A medium-risk mutual fund is typically associated with a balanced fund. These funds typically have an asset allocation that falls between 25% and 75% in stocks. They would have a lower expected return than a high-risk fund, but they would also have lower volatility.

Low-Risk Mutual Funds

If you’re interested in long-term investments that are designed to preserve your assets and maintain a steady, modest return, then a low-risk mutual fund might be a good fit for you. These funds usually invest in very safe, steady assets such as government bonds and cash. They’re designed to generate a constant, low return over a long period of time. A low-risk mutual fund is typically associated with a money market fund or a short-term bond fund. These funds typically have an asset allocation of 75% to 100% in cash or government bonds. They would have a low expected return, but they would have very low volatility.

Safeguard Investors’ Assets With a High-Risk Fund

If you’re looking to safeguard your assets while still earning a decent return, you might want to consider a high-risk mutual fund. These funds take on a high risk of loss in the hopes of getting a high return. With a high-risk fund, you could lose a lot of money, but if you pick the right fund, you could also make a lot of money. That’s why it’s important to do your research and understand the types of risk you are taking on with each fund. A high-risk fund is typically associated with stocks and other highly volatile assets. If you want to protect your assets in a high-risk fund, you may want to consider diversifying your portfolio over a number of funds. This can help to minimize your risk and make sure that you get a good return on your investment. High-risk funds are generally reserved for experienced and seasoned investors who can handle losing money.

Determine Whether You Want Growth Or Preservation With a Medium Risk Fund

If you’re trying to decide between a high and medium-risk fund, you may want to determine whether you want to focus on preservation or growth. You could have different funds for each objective. This could help you to diversify your portfolio and make sure that your funds aren’t all tied to one type of risk. If you want to maintain your assets but consistently grow them over time, then you may want to look into a medium-risk fund. These funds typically invest in less volatile assets, such as bonds and cash. They’re designed to deliver a modest return over time without taking on a high risk of loss. A medium-risk fund is typically associated with a balanced fund. These funds typically have an asset allocation that falls between 25% and 75% in stocks. They would have a lower expected return than a high-risk fund, but they would also have lower volatility.

Decide on Long-Term Investment with a Low-Risk Fund

If you’re most interested in long-term investments that will protect your assets and maintain a steady, modest return, then you may want to consider a low-risk mutual fund. These funds usually invest in very safe, steady assets such as government bonds and cash. They’re designed to generate a constant, low return over a long period of time without ever taking on a high level of risk. A low-risk mutual fund is typically associated with a money market fund or a short-term bond fund. These funds typically have an asset allocation of 75% to 100% in cash or government bonds. They would have a low expected return, but they would have very low volatility.

Bottom line

When you’re picking a mutual fund, it’s important to understand what kind of risk you’re taking on. Your risk level is directly related to how likely your fund is to lose money. The higher the risk, the quicker your potential return on investment could be, but that also means a greater possibility of losing money. That’s why it’s so important to understand which type of risk you’re taking on. If you’re not sure which fund is right for you, it might be best to consult with a financial advisor.

Also Read: Mistakes Made When Choosing Mutual Funds