subject: Top Low Risk Investments And Mutual Funds [print this page] Investment products should not be picked solely upon the basis of rate of return. This is due to the fact that the rate of return is only an averaged value, and does not reflect that returns have a distribution of behaviors. For example, think about a stock that can only show two kinds of behavior. There is a 95/100 chance that it doubles, and then a 5/100 chance that it goes to 0.
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.
Of course all stocks exhibit a kind of randomness and stochasticity, therefore all stocks have both averaged rates of returns as well as risk profiles. A case in point is the junk bond, usually issued by a company that is in dire straits or at the verge of bankruptcy but needs money that is not forthcoming. The bonds have very high rates of return but also can default completely if the company also falls apart.
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.
The day-to-day activities of a government, such as ensuring police are doing their job on the city level, or the public college accepting students on the state level, relies upon loaned money. Such a large scale borrowing has no hope of being accomplished using a regular bank, but must be self-financed via the distribution of bonds that are guarantees of repayment. Private investors, companies and even countries buy bonds issued by the United States government on account of historical performance and robustness of the United States economy.
