Best Mutual Funds for Beginners (Low Risk)

Investing in low-risk mutual funds is a great option for investors who prioritize stability over high returns. But, as with all investments, it’s important to understand the risks before you get started.

Some of the key risks of investing in low-risk mutual funds include market risk, interest rate risk, and management risk. But, there are several ways to minimize these risks, such as choosing a low-cost fund and avoiding front-end sales charges or loads.

What are mutual funds?

Mutual funds combine money from many investors to buy securities like stocks, bonds and real estate that they might not be able to afford on their own. They offer the advantage of access to diversified portfolios that can potentially reduce volatility and improve your overall return. There are various kinds of mutual funds, including stock, bond, cash and index funds. Each has its own investment strategy and fees.

A key consideration when choosing mutual funds is to understand your investing goals and risk tolerance. Beginners are often best served by taking advantage of a workplace retirement plan, like a 401(k), which lets them invest automatically through payroll deductions. Many of these plans also provide employer matching funds, which can double your contribution.

Another important factor is understanding fees and costs, which can vary widely among mutual funds. You should pay attention to transaction fees in your brokerage account (typically a percentage of each trade), as well as the annual operating expenses, front- and back-end sales loads and other fund charges that can take a bite out of your returns.

You should also consider the style and size of companies that a mutual fund holds. A large-cap value fund might hold companies with stable financials but lower growth prospects, while a small-cap technology fund might invest in startups with high growth potential. Finally, you should consider if the fund is actively managed or passively managed. Actively managed funds typically charge higher fees than passive funds, which attempt to replicate the performance of a market index through low-cost trading.

Why are they good for beginners?

Starting your wealth-building journey doesn’t have to involve risky investments. Beginners can build a solid portfolio with safe investments like mutual funds and ETFs. These investments are often available through workplace retirement plans or brokerage accounts. They’re also commonly used by robo-advisors, which manage and track your investment portfolio for you. These beginner-friendly safe investments can help you maximize long-term growth and minimize short-term risk.

Whether you’re investing in an all-stock fund or one that’s more diversified, you can use these beginner-friendly safe investments to start your journey to financial security. Keep in mind, though, that no investment is truly risk-free. The value of your savings account can decline over time due to inflation, while dividend payouts from stocks and other investments can decrease if the company you invest in fails or suffers from major setbacks.

A low-risk mutual fund can protect you against that kind of risk by investing in safe securities like government bonds and high-rated debt instruments. These safer investments provide steady income, reducing your chances of losing your principal. They’re great for investors who prioritize capital preservation over high returns and are close to or in retirement, as they can provide a cushion against stock market volatility. Remember, past performance isn’t necessarily indicative of future results, so be sure to diversify your portfolio among different assets and monitor your returns over time.

What are the best low-risk mutual funds?

Every investment has a natural trade-off between risk and potential returns. While lower-risk assets like savings accounts, money market funds and multiyear guaranteed annuities may not provide the high returns of more aggressive assets, they can play a crucial role in a diversified portfolio by providing stability and steady-but-modest growth.

For beginners, some top options include high-yield savings accounts, certificates of deposit (CDs) and money market mutual funds that invest in stable short-term debt instruments and Treasury securities. These funds typically earn higher yields than savings accounts and are FDIC insured. Money market funds also maintain a stable $1 per share value and are ideal for investors who prioritize liquidity and safety.

Other low-risk investments that can generate moderate, steady returns over the long term include bond funds and stock index funds. These types of funds invest across a wide range of stocks, which helps mitigate volatility and provides more opportunity for growth. Lastly, there are fixed-income mutual funds that offer stable, safe returns and can be used to help protect against rising interest rates.

It’s important to remember that no investment is ever completely risk-free, even FDIC-insured savings accounts and CDs can lose purchasing power over time due to inflation. Rather, the best way to minimize risk is to diversify your portfolio with a mix of low-risk investments that align with your goals, timeline and comfort level.

What are the pros and cons of investing in low-risk mutual funds?

While it’s important to keep in mind that no investment is risk-free, mutual funds come with a number of advantages. They provide diversification, professional management and lower costs than other types of investments. Plus, they often have the potential to offer higher long-term returns than some other investments, such as stocks.

However, when choosing safe investments, it’s crucial to do your research first. Make sure you understand the fund’s investment approach, fees and past performance. Also, assess your own risk tolerance and financial goals to ensure they’re aligned with the funds you select.

In addition, keep in mind that low-risk investments typically offer lower returns than more aggressive options, which can mean a longer timeframe before you see significant gains. Also, inflation can erode the purchasing power of money stashed in low-risk investments over the long term.

Lastly, it’s crucial to stick with your plan and avoid chasing past performance. Remember the old investing adage that “past performance is no guarantee of future results.”

With interest rates still near historic highs, there are many opportunities to earn a respectable return on your cash. From money market funds to Treasury securities, you have a variety of relatively low-risk ways to grow your savings and meet your financial goals. But beware of overestimating the value of low-risk investments, which can eat into your potential profits.