I have 10K to invest, what are my options with reasonable risk/income?

Question

So I have 10K to invest. I did not do any sorts of investments before and I am really scared coz I don't know any information and risks and all that. I heard that mutual funds is something to look at, but I cannot find realizable info on what is average annual income if I invest in mutual funds. Are there any fees, how easy is to get money from mutual funds? Could you please give me some picture with comparison to market savings account and CDs. Right now Savings account offer around 1.5% interest and 5 year CDs offer around 2.5% or even 3%. Saving accounts let me to use my money without restrictions and have it whenever I want, CDs freeze money but give peace in mind. What would be my realistic expectations for annual income if I invest in mutual funds? What are other options? No crypto and all that

Answer 1

What would be my realistic expectations for annual income if I invest in mutual funds?

There is a very broad spectrum of "mutual funds" with different return expectations (I use the work return instead of income deliberately). With any investment, there is a trade-off between return (amount on average that the investment increases or decreases) and risk (the amount that the return can fluctuate.

Your savings account has very low return, but zero risk. You are going to get 1.5% out of it regardless of anything that happens in the market or economy. A CD is also zero risk, but you have to commit the money for a longer period, hence a larger return (compensation for lack of liquidity).

The expected (average) return in the stock market as a whole is somewhere about 10% if you reinvest dividends that are paid. However, that number can vary from year to year between -30% (crashes like 2008) and +40% (boom years like 1995).

There are two pieces of risk to consider: risk tolerance and risk capacity. Risk tolerance is your emotional ability to handle large fluctuations in your investment. Risk capacity is your financial ability to absorb losses.

If this money is for retirement (meaning you don't need the income now) and you can absorb losses knowing that the market will likely rebound before you do need the income, then your risk capacity is high. If, however, you watch the stock market daily and get worried when it drops, then your risk tolerance is low and should choose lower-risk investments like bonds.

All that to say that your expectations should be based on the average returns of what you're invested in, and what you're invested in should reflect your ability to tolerate and absorb risk.