Index Mutual Funds And Lowest Risk Investments
Investors need to be educated about the qualities to look for in investments. There is more than just the rate of return, there is also the amount of risk which can be quantified. A simple example can help clarify what this means. Imagine a stock that can do two things at the end of the year. It has a 95% chance of doubling, and a 5% chance of losing all its value.
For such a stock, one can calculate the expected rate of return at 2 * 0.95 or 190%. So the investor on average expects a 90% return, but he or she also knows that there is a nonnegligible chance of a 100% loss. To many this is unacceptably high. To compare, an imaginary stock that has a 0% chance of being wiped out and a 100% of making 5% return is really one of the low risk investments.
The truth is that almost all investment products have a balance of risk versus reward. The case is that investments with higher rates of return will usually suffer from higher rates of risk. A really good example is a B grade junk bond issued by firms that are at risk of bankruptcy but require a lot of capital. Low risk investments are the opposite, such as bank CDs that are guaranteed to yield some very low return.
There are a variety of investment products that can be weighed for their reward and risk.
A money market deposit account is a sort of investment security for individual investors interested in keeping assets in a secure, accessible locale while accruing more interest than a traditional savings account. Money market accounts are likewise guaranteed in the event of a bank collapse by the FDIC. The investor needs to realize that a money market account is not identical to a money market fund account. The former is the offering of one bank and guarantees an interest rate. The second is a portfolio of money market securities and does not have one interest rate, instead offering slightly changing returns over the life of the fund.
An unappreciated pearl in the financial world is the Ginnie Mae mutual fund, frequently eclipsed by the related companies Fannie Mae and Freddie Mac. The triplet guarantee property borrowing but GNMA funds are thought to be the most conservative. In the time of the housing crisis of 2007-2008, when Freddie Mac and Fannie Mae were excoriated due to their part in lending to underfunded home buyers, Ginnie Mae emerged largely unsullied because of extremely conservative positions. A fund which invests in greater than 85% of total assets in GNMA-related instruments is called a GNMA mutual fund.
Major companies and governments need to take out loans so as to realize normal operations until ample income is generated to pay back the borrowed money. The loaned resources is as a bond which is basically a promise to return the borrowed money in addition to some extra yield. Personal investors, firms and even sovereignties buy bonds issued by the United States government on account of perceived trustworthiness and robustness of the United States economy.
Extra resources provided for mutual fund ratings can be read here. This site discusses how to select commodity mutual funds.