What is the risk-return tradeoff in mutual funds?
The risk-return tradeoff is a basic principle in investing — it means that to earn higher returns, you usually need to take higher risks.
And if you prefer lower risk, you'll likely have to settle for lower returns.
This concept is very important in mutual fund investing, as different types of mutual funds carry different levels of risk and potential return.
Why this tradeoff exists:
- Low-risk funds (like debt funds) invest in stable assets such as government bonds or corporate debt. These are less volatile but also offer limited growth.
- High-risk funds (like equity funds) invest in the stock market, which can fluctuate in the short term but has the potential to grow significantly over the long term.
The longer you stay invested, especially in high-risk funds like equities, the more time your investment has to recover from short-term losses.
Diversifying your investment across different types of funds can help balance risk and return.
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