question 5 of 10 why are mutual funds considered a high-risk form of investment? a. they rely on risky practices such as investing | Question AI (2024)

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Question 5 of 10 why are mutual funds considered a high-risk form of investment? a. they rely on risky practices such as investing | Question AI? ›

Explanation. Mutual funds are considered a high-risk form of investment primarily because they involve buying stocks, bonds, or other securities that have unpredictable values.

While mutual funds offer potential benefits, investors also face risks like market fluctuations. Market risk is a primary concern as the value of securities can go up or down based on changes in market conditions. A poorly performing sector or bad fund management could result in substantial losses.

While mutual funds offer the potential for high returns, they also come with a higher level of risk compared to other options. Here are a few reasons why mutual funds are considered more risky: 1. Market Volatility: Mutual funds are subject to market fluctuations.

They are suitable for aggressive investors with investment horizons of 5-10 years or more. Also, sector-specific and thematic mutual funds are also considered quite risky because of their concentration in specific industries or themes, making them susceptible to market fluctuations and sector-specific challenges.

Mutual funds are a lucrative investment option for investors looking for tax-efficient returns that are typically higher than alternatives such as fixed deposits. Although mutual funds are generally considered a reliable investment, there are high-risk and low-risk categories within it as well.

High-risk investments typically offer lower levels of liquidity than mainstream investments, so, particularly if something's gone wrong and performance hasn't met expectations, getting access to your money when you want may not be as easy.

Risk reduction: Mutual funds invest your money into a diversified investment portfolio of shares, bonds and securities. Owing to professional management and diversification, mutual funds have low investment risk.

Mutual funds are generally considered a safer investment than stocks because they offer built-in diversification—something that helps mitigate the risk and volatility in your portfolio.

But there are no guarantees of profits when you buy stock, which makes stock one of the most risky investments. If a company doesn't do well or falls out of favor with investors, its stock can fall in price, and investors could lose money.

Why are mutual funds subject to market risk? ›

Reasons behind market risks

Mutual funds pool money from different investors and invest in various securities, such as stocks and bonds. Now, these securities are affected by different market and economic risks, which, in turn, affect funds and exposes them to market risks. Let's explore the connection in detail.

What Is Downside Risk? Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.

Risk: Bonds, especially government and reputable corporate bonds, are often perceived as less risky than equities. Their returns are usually fixed and predictable. Mutual funds, especially equity-oriented ones, can be more volatile, with returns subject to market fluctuations.

Explanation. Mutual funds are considered a high-risk form of investment primarily because they involve buying stocks, bonds, or other securities that have unpredictable values.

To sum up, moderate-risk mutual funds aims to offer a balance between risk and reward, making them an ideal choice for investors seeking stable returns with moderate risk. These funds invest in a mix of equity and debt instruments, which helps to diversify the portfolio and reduce risk.

Low Risk and Short Duration

As stated above, money market funds are often considered less risky than their stock and bond counterparts. That's because these types of funds typically invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-Bills), and short-term commercial paper.

Equities are generally considered the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the successes and failures of private businesses in a fiercely competitive marketplace. Equity investing involves buying stock in a private company or group of companies.