At their most basic level, risk and possible rewards are two sides of the same coin because they are both parts of the same plan. When a market is doing well, there is a link between taking on more risk and having the chance to make more money. Low-Risk Investments are, however, deemed to be safer.
When you put these ideas together, you can see how investors decide which assets to buy on the market and how they decide how much an investment is worth.
Mutual funds work on the same principle: the more risk you take, the more unique the rewards are likely to be, but there is also a chance you could lose all of your money.
But there are times when investing in a low-risk mutual fund could lead to a significant return on the investment. In this article, we’ll look at a few of these situations.
What Are Risks And Returns?
How much an investor stands to lose from their initial investment may determine how ready they are to accept risk. The term “risk” may refer to the likelihood of suffering a loss and the potential difficulties such loss can have on your life.
For instance, when a trader calls a specific investment “high-risk,” they can suggest that you’ll probably lose money, that you might lose all of your money, or that you might encounter both of these outcomes.
The Top Investors in India advise other investors, including ourselves, to avoid investing money that we would need within the next five years due to the possibility of losing it.
The amount you anticipate making back in proportion to the initial investment is the “return on investment (ROI).” Any profit that exceeds the original investment by even one rupee qualifies as a return.
When expressed as a negative sum, the term “return” may refer to the amount of money lost. Returns are always calculated as a percentage of the investment, regardless of the context.
Risk and return need to be tightly correlated for an investment to be successful. When investing, there is a more considerable risk involved. Thus, there should be a greater probability of gaining money.
On the other side, a very risk-free investment, often known as a low-risk investment, should typically have a poor return. The market operates in this manner. Try investing in mutual funds with the Best mutual fund app in India.
Why does high risk always not equal high returns?
The typical investment mindset is a direct correlation between risk and return. In other words, you must be ready to accept the greater risk if you want a higher return. But is that precise? Yes, but not always.
Historical data-based academic research demonstrates that equities with lower risk have outperformed companies with higher risk over time. This finding, known as the “low-volatility anomaly,” acts on risk-adjusted.
The term “risk-adjusted” denotes a comparison of an investment’s gain or loss to its level of risk. Therefore, if two stocks perform similarly over time, the one with lower risk will have a higher risk-adjusted return.
Consider an investment of Rs. 1,000 that increased by Rs. 100 in the first year. You would begin Year 2 with Rs. 1,100 if you invested the Rs. 100 you earned.
As a result of this more outstanding starting position, you might gain (or lose). It is what we mean when we talk about “compounding,” demonstrating why it may be an investor’s greatest friend.
Investing may, of course, result in financial loss. Additionally, substantial losses weaken the potential of compounding. A volatile investment may perform better than most while the market is rising but may perform far worse than most when the market is falling.
A stock or portfolio must climb more to make up lost ground. Because it is difficult to recover from substantial losses, it is thus advisable to prevent them or invest for a more extended period — at least one year. Tradition holds that the long-term average return on stocks is about 10% yearly.
MF Investment Factors For The Highest Returns With Minimal Risks
How does it work? How can you get the most money with the least amount of risk? Even though there is no “master key,” the following factors can help you lower the overall risk of your mutual fund portfolio:
- Understanding your Risk Tolerance
Remember that each investor has a different level of risk tolerance. It can also change as you go through various stages of life. So, you first need to consider how much risk you are willing to take. Consider your financial goals and responsibilities, and be careful where you draw the line.
- Research
You have access to thousands of different types of mutual fund plans. Even if your family and friends suggest specific objectives, it’s a good idea to look into the mutual fund market before deciding.
Every fund manager tries to give investors the best possible returns based on different risk levels while keeping the portfolio as safe as possible. However, it would help if you are looking for plans that fit the amount of risk you are willing to take, not one your friend or family suggests.
- Calculate
The scheme documents write down the risk of investing in a mutual fund. Before choosing a fund based on the risk meter, look at the fund’s portfolio and how it divides its assets.
It will help you figure out if the risks are something you can handle. Also, learn more about the fund manager and look at the history of the different funds they have managed.
- Taxes
If you do not adequately prepare, taxes may consume a significant portion of your returns. Because of this, it is crucial to pay attention to tax requirements when computing returns.
The Final Word
Many people who invest tend to concentrate only on the profits of their investments, paying little attention to the risks involved. Knowing that more risk does not automatically guarantee a higher return when making judgments about investments is helpful.
The above factors for maximum returns with minimum risks are helpful when evaluating an investment in stocks, bonds, or mutual funds. However, although volatility risk might affect an investment’s quality, it is not the only one you should look at for investing.
It is also vital to consider that the outcomes are not guaranteed to be what you expect. Thus, it is helpful to create an investment portfolio that is appropriately diversified to assist with risk management.