Are mutual funds a good choice for a medium to low risk investment with a two year horizon?
"First, you don't state where you are and this is a rather global site.  There are people from Canada, US, and many other countries here so ""mutual funds"" that mean one thing to you may be a bit different for someone in a foreign country for one point.  Thanks for stating that point in a tag. Second, mutual funds are merely a type of investment vehicle, there is something to be said for what is in the fund which could be an investment company, trust or a few other possibilities.  Within North America there are money market mutual funds, bond mutual funds, stock mutual funds, mutual funds of other mutual funds and funds that are a combination of any and all of the former choices.  Thus, something like a money market mutual fund would be low risk but quite likely low return as well.  Short-term bond funds would bring up the risk a tick though this depends on how you handle the volatility of the fund's NAV changing.  There is also something to be said for open-end, ETF and closed-end funds that are a few types to consider as well. Third, taxes are something not even mentioned here which could impact which kinds of funds make sense as some funds may invest in instruments with favorable tax-treatment. Aside from funds, I'd look at CDs and Treasuries would be my suggestion.  With a rather short time frame, stocks could be quite dangerous to my mind. I'd only suggest stocks if you are investing for at least 5 years.  In 2 years there is a lot that can happen with stocks where if you look at history there was a record of stocks going down about 1 in every 4 years on average.  Something to consider is what kind of downside would you accept here?  Are you OK if what you save gets cut in half?  This is what can happen with some growth funds in the short-term which is what a 2 year time horizon looks like.  If you do with a stock mutual fund, it would be a gamble to my mind.  Don't forget that if the fund goes down 10% and then comes up 10%, you're still down 1% since the down will take more." I assume you mean Stock Mutual funds.  2008 wasn't that long ago. Down 37%. 07/08 combined were down 34%, or 07/09 down 20%.  The point of the long term is that over time, a decade will almost ensure a positive return.  2 years is too short, in my opinion.
"First: what's your risk tolerance? How long is your investment going to last? If it's a short-term investment (a few years) and you expect to break even (or better) then your risk tolerance is low. You should not invest much money in stocks, even index funds and ""defensive"" stocks. If, however, you're looking for a long-term investment which you will put money into continually over the next 30 years, the amount of stock you purchase at any given time is pretty small, so the money you might lose by timing the market wrong will also be rather small. Also, you probably do a remarkably poor job of knowing when to buy stocks. If you actually knew how to time the market to materially improve your risk-adjusted returns, you've missed your calling; you should be making six figures or more on Wall Street. :)" If your requirements are hard (must have $1000/month, must have the same or bigger in capital at the end), stocks are a poor choice of investment. However, in many cases, people are willing to tolerate some level of risk to achieve the expected returns. You also do not mention inflation, which can take quite a lot out of your portfolio over the course of ten years. If we make some simplifying assumptions, you want to generate $12,000 a year. You can realistically expect the (whole) stock market, long term (i.e. over time periods substantially longer than 10 years), to return approximately 4 - 5% after factoring in inflation. That means an investment of $240,000 - $300,000 (the math is simplified somewhat here). If you don't care about inflation, you can up the percentage rather somewhat. According to this article, the S&P 500 returned an average of 11.31% from 1928 through 2010 (not factoring in inflation), which would require an investment of approximately $106,100. But! This opens you up to substantial risk. The stock market may go down 30% this year! According to the above article, the S&P returned only 3.54% from 2001 to 2010. Long-term, it goes up, but your investment case is really unsuited to investing in an index to the entire stock market given your requirements. You may be better suited investing primarily in stable bonds, or perhaps a mix of bonds and stocks. Alternatively, you may want to consider even more stable investments such as treasury notes. Treasury notes are all but guaranteed, but with a lousy rate of return. Heck, you could consider a GIC (that may be Canada-only) or even a savings account. There's also the possibility of purchasing an annuity, though almost everyone will advise against such. Personally, I'd go for a mutual fund which invested approximately 70% bonds and the rest in stocks over such a time period. Something like ING Direct's Streetwise Balanced Income Portfolio, if you were in Canada. It substantially lowers your expected return but also lowers your risk. I can't honestly say what the expected return there is; at this point, it's returned 4% per year (before inflation), but has been around only since the beginning of 2008. And to be clear, this is absolutely not free of risk. "Some thoughts: 1) Do you have a significant emergency fund (3-6 months of after-tax living expenses)? If not, you stand to take a significant loss if you have an unexpected need for cash that is tied up in investments. What if you lose/hate your job or your car breaks down? What if a you want to spend some time with a relative or significant other who learns they only have a few months to live? Having a dedicated emergency fund is an important way to avoid downside risk. 2) Lagerbaer has a good suggestion. Given that if you'd reinvested your dividends, the S&P 500 has returned about 3.5% over the last 5 years, you may be able to get a very nice risk-free return.  3) Do you have access to employer matching funds, such as in a 401(k) at work? If you get a dollar-for-dollar match, that is a risk-free pre-tax 100% return and should be a high priority. 4) What do you mean by ""medium"" volatility? Given that you are considering a 2/3 equity allocation, it would not be at all out of the realm of possibility that your balance could fall by 15% or more in any given year and take several years to recover. If that would spook you, you may want to consider lowering your equity weights. A high quality bond fund may be a good fit. 5) Personally, I would avoid putting money into stocks that I didn't need back for 10 years. If you only want to tie your money up for 2-5 years, you are taking a significant risk that if prices fall, you won't have time to recover before you need your money back. The portfolio you described would be appropriate for someone with a long-term investment horizon and significant risk tolerance, which is usually the case for young people saving for retirement. However, if your goals are to invest for 2-5 years only, your situation would be significantly different.  6) You can often borrow from an investment account to purchase a primary residence, but you must pay that amount back in order to avoid significant taxes and fees, unless you plan to liquidate assets. If you plan to buy a house, saving enough to avoid PMI is a good risk-free return on your money. 7) In general, and ETF or index fund is a good idea, the key being to minimize the compound effect of expenses over the long term. There are many good choices a la Vanguard here to choose from. 8) Don't worry about ""Buy low, sell high"". Don't be a speculator, be an investor (that's my version of Anthony Bourdain's, ""don't be a tourist, be a traveler""). A speculator wants to sell shares at a higher price than they were purchased at. An investor wants to share in the profits of a company as a part-owner. If you can consistently beat the market by trying to time your transactions, good for you - you can move to Wall Street and make millions. However, almost no one can do this consistently, and it doesn't seem worth it to me to try. I don't mean to discourage you from investing, just make sure you have your bases covered so that you don't have to cash out at a bad time. Best of luck! Edit Response to additional questions below. 1) Emergency fund. I would recommend not investing in anything other than cash equivalents (money market, short-term CDs, etc.) until you've built up an emergency fund. It makes sense to want to make the ""best"" use of your money, but you also have to account for risk. My concern is that if you were to experience one or more adverse life events, that you could lose a lot of money, or need to pay a lot in interest on credit card debt, and it would be prudent to self-insure against some of those risks. I would also recommend against using an investment account as an emergency fund account. Taking money out of investment accounts is inefficient because the commissions/taxes/fees can easily eat up a significant portion of your returns. Ideally, you would want to put money in and not touch it for a long time in order to take advantage of compounding returns. There are also high penalties for early disbursements from retirement funds. Just like you need enough money in your checking account to buy food and pay the rent every month, you need enough money in an emergency fund to pay for things that are a real possibility, even if they are less common. Using a credit card or an investment account is a relatively expensive way to do this. 2) Invest at all? I would recommend starting an emergency fund, and then beginning to invest for retirement. Once your retirement savings are on track, you can begin saving for whatever other goals you may have" I think that Dave Ramsey has a good approach to emergency funds. Save $1,000 that is immediately accessible in an emergency, pay off your debts, then build a 3-6 month fund. Two years is great, but takes a really long time to build up. As stated in the comments, Index Funds are the way to go. Stocks have the best return on investment, if you can stomach the volatility, and the diversification index funds bring you is unbeatable, while keeping costs low.  You don't need an Individual Savings Account (UK), 401(k) (US) or similar, though they would be helpful to boost investment performance. These are tax advantaged accounts; without them you will have to pay taxes on your investment gains. However, there's still a lot to gain from investing, specially if the alternative is to place them in the vault or similar. Bear in mind that inflation makes your money shrink in real terms. Even a small interest is better than no interest.  By best I mean that is safe (regulated by the financial authorities, so your money is safe and insured up to a certain amount) and has reasonable fees (keeping costs low is a must in any scenario).  The two main concerns when designing your portfolio are diversification and low TER (Total Expense Ratio). As when we chose broker, our concern is to be as safe as we possibly can (diversification helps with this) and to keep costs at the bare minimum.  Some issues might restrict your election or make others seem better. Depending on the country you live and the one of the fund, you might have to pay more taxes on gains/dividends. e.g. The US keeps some of them if your country doesn't have a special treaty with them. Look for W-8Ben and tax withholding for more information.  Vanguard and Blackrock offer nice index funds. Morningstar might be a good place for gathering information. Don't trust blindly the 'rating'. Some values are 'not rated' and kick ass the 4 star ones. Again: seek low TER. Not a big fan of this point, but I'm bound to mention it. It can be actually helpful for sorting out tax related issues, which might decide the kind of index fund you pick, and if you find this topic somewhat daunting. You start with a good chunk of money, so it might make even more sense in your scenario to hire someone knowledgeable and trustworthy. I hope this helps to get you started. Best of luck. I would agree with the other answers about it being a bad idea to invest in stocks in the short term. However, do consider also long-term repairs. For example, you should be prepared to a repair happening in 20 years in addition to repairs happening in a couple of months. So, if it is at all possible for you to save a bit more, put 2% of the construction cost of a typical new house (just a house, not the land the house is standing on) aside every year into a long-term repair fund and invest it into stocks. I would recommend a low-cost index fund or passive ETF instead of manually picking stocks. When you have a long-term repair that requires large amounts of money but will be good for decades to come, you will take some money out of the long-term repair fund. Where I live, houses cost about 4000 EUR per square meter, but most of that is the land and building permit cost. The actual construction cost is about 2500 EUR per square meter. So, I would put away 50 EUR per square meter every year. So, for example, for a relatively small 50 square meter apartment, that would mean 2500 EUR per year. There are quite many repairs that are long-term repairs. For example, in apartment buildings, plumbing needs to be redone every 40 years or so. Given such a long time period, it makes sense to invest the money into stocks. So, my recommendation would be to have two repair funds: short-term repairs and long-term repairs. Only the long-term repair fund should be invested into stocks. Note that many funds just track indexes. In that case, you essentially don't have to worry about the fund manager making bad decisions. In general, the statistics are very clear that you want to avoid any actively managed fund. There are many funds that are good all-in-one investments. If you are in Canada, for example, Canadian Couch Potato recommends the Tangerine Investment Funds. The fees are a little high, but if you don't have a huge investment, one of these funds would be a good choice and appropriate for 100% of your investment. If you have a larger investment, to the point that Tangerine's MER scares you a little, you still may well look at a three or four fund (or ETF) portfolio. You may choose to use an actively-managed fund even though you know there's virtually no chance it'll beat a fund that just tracks an index, long-term. In that case, I'd recommend devoting only a small portion of your portfolio to this fund. Many people suggest speculating with no more than 10% of your combined investment. Note that other people are more positive on actively-managed funds. Let's say that you want to invest in the stock market.  Choosing and investing in only one stock is risky.  You can lower your risk by diversifying, or investing in lots of different stocks.  However, you have some problems with this:  When you buy stocks directly, you have to buy whole shares, and you don't have enough money to buy even one whole share of all the stocks you want to invest in. You aren't even sure which stocks you should buy. A mutual fund solves both of these problems.  You get together with other investors and pool your money together to buy a group of stocks.  That way, your investment is diversified in lots of different stocks without having to have enough money to buy whole shares of each one.  And the mutual fund has a manager that chooses which stocks the fund will invest in, so you don't have to pick. There are lots of mutual funds to choose from, with as many different objectives as you can imagine.  Some invest in large companies, others small; some invest in a certain sector of companies (utilities or health care, for example), some invest in stocks that pay a dividend, others are focused on growth.  Some funds don't invest in stocks at all; they might invest in bonds, real estate, or precious metals.  Some funds are actively managed, where the manager actively buys and sells different stocks in the fund continuously (and takes a fee for his services), and others simply invest in a list of stocks and rarely buy or sell (these are called index funds). To answer your question, yes, the JPMorgan Emerging Markets Equity Fund is a mutual fund.  It is an actively-managed stock mutual fund that attempts to invest in growing companies that do business in countries with rapidly developing economies. Taking into account that you are in Cyprus, a Euro country, you should not invest in USD as the USA and China are starting a currency war that will benefit the Euro. Meaning, if you buy USD today, they will be worth less in a couple of months. As for the way of investing your money. Look at it like a boat race, starting on the 1st of January and ending on the 31st of December each year. There are a lot of boats in the water. Some are small, some are big, some are whole fleets. Your objective is to choose the fastest boat at any time. If you invest all of your money in one small boat, that might sink before the end of the year, you are putting yourself at risk. Say: Startup Capital. If you invest all of your money in a medium sized boat, you still run the risk of it sinking. Say: Stock market stock. If you invest all of your money in a supertanker, the risk of it sinking is smaller, and the probability of it ending first in the race is also smaller. Say: a stock of a multinational. A fleet is limited by it's slowest boat, but it will surely reach the shore. Say: a fund. Now investing money is time consuming, and you may not have the money to create your own portfolio (your own fleet). So a fund should be your choice. However, there are a lot of funds out there, and not all funds perform the same.  Most funds are compared with their index. A 3 star Morningstar rated fund is performing on par with it's index for a time period. A 4 or 5 star rated fund is doing better than it's index. Most funds fluctuate between ratings. A 4 star rated fund can be mismanaged and in a number of months become a 2 star rated fund. Or the other way around. But it's not just luck. Depending on the money you have available, your best bet is to buy a number of star rated, managed funds. There are a lot of factors to keep into account. Currency is one. Geography, Sector... Don't buy for less than 1.000€ in one fund, and don't buy more than 10 funds. Stay away from Gold, unless you want to speculate (short term). Stay away from the USD (for now). And if you can prevent it, don't put all your eggs in one basket. If you look at history, it shows that the more people predict corrections the less was the chance they came. That doesn't prove it stays so, though. 2017 is not any different than other years in the future: Independent of this, with less than ten years remaining until you need to draw from your money, it is a good idea to move away from high risk (and high gain); you will not have enough time to recover if it goes awry. There are different approaches, but you should slowly and continuously migrate your capital to less risky investments. Pick some good days and move 10% or 20% each time to low-risk, so that towards the end of the remaining time 90 or 100% are low or zero risk investments. Many investment banks and retirement funds offer dedicated funds for that, they are called 'Retirement 2020' or 'Retirement 2030'; they do exactly this 'slow and continuous moving over' for you; just pick the right one. Bond aren't necessarily any safer than the stock market.  Ultimately, there is no such thing as a low risk mutual fund. You want something that will allow you get at your money relatively quickly. In other words, CDs (since you you can pick a definite time period for your money to be tied up), money market account or just a plain old savings account. Basically, you want to match inflation and have easy access to the money.  Any other returns on top of that are gravy, but don't fret too much about it. See also: Where can I park my rainy-day / emergency fund? Savings accounts don’t generate much interest. Where should I park my rainy-day / emergency fund? If you are younger, and you not under undue pressure to buy a home at any particular time, investing in the market is a reasonable way to prepare.  Your risk tolerance should be high.   Understand that this means you may buy in 3-4 years instead of 1-2 if the market takes a down turn.  It took ~3-4 years for the S&P 500 to recover from the 2008 crash. I doubt anything that severe is in the making, but there is always an element of risk involved in investing. If you and your family will be busting at the seams of your current rental in a year, then maybe the bond fund advice others have provided is a better option.  If you are willing to be flexible, a more aggressive strategy might be appropriate. Likely, you want something along the lines of the Vanguard S&P 500 mutual fund - something that is diversified (a large number of stocks), in relatively safe companies (in this case the 500 companies that Standard and Poor's think are most likely to repay corporate bonds), and 'indexed' vice 'actively managed' (indexed funds have lower fees because they are using 'rules' to pick the stocks rather than paying a person to evaluate them.) It's going to depend on you and your situation - and regardless of what you choose consistency will be key: put your investment on automatic so it happens every month without your input. I am understanding the OP to mean that this is for an emergency fund savings account meant to cover 3 to 6 months of living expenses, not a 3-6 month investment horizon. Assuming this is the case, I would recommend keeping these funds in a Money Market account and not in an investment-grade bond fund for three reasons: Your idea is a good one, but, as usual, the devil is in the details, and implementation might not be as easy as you think.  The comments on the question have pointed out your Steps 2 and 4 are  not necessarily the best way of doing things, and that perhaps  keeping the principal  amount invested in the same fund instead of taking it all out and re-investing it in a similar, but different, fund might be better. The other points for you to consider are as follows. How do you identify which of the thousands of conventional mutual  funds and ETFs is the average-risk / high-gain mutual fund into which you will place your initial investment?  Broadly speaking, most actively managed mutual fund with average risk are likely to give you  less-than-average gains over long periods of time.  The  unfortunate truth, to which many pay only Lipper service, is that  X% of actively managed mutual funds  in a specific category failed  to beat the average gain of all funds in that category, or the  corresponding index, e.g. S&P 500 Index for large-stock mutual funds, over the past N years, where X is generally between 70 and  100, and N is 5, 10, 15 etc.  Indeed, one of the arguments in  favor of investing in a very low-cost index fund is that you are effectively guaranteed the average gain (or loss :-(, don't forget the possibility of loss). This, of course, is also the argument used against investing in index funds.  Why invest in boring index funds and settle for average gains (at essentially no risk of not getting the average performance: average performance is close to guaranteed) when you can  get much more out of your investments by investing in a fund that is among the (100-X)% funds that had better than average returns?  The difficulty is that which funds are X-rated and which non-X-rated (i.e. rated G = good or PG = pretty good), is known only in hindsight whereas what you need is foresight. As everyone will tell you, past performance does not guarantee future results.  As someone (John Bogle?) said,  when you invest in a mutual fund, you are in the position of a rower in rowboat: you can see where you have been but not where you are going.  In summary, implementation of your strategy needs a good crystal ball to look into the future. There is no such things as a guaranteed bond fund. They also have risks though not necessarily the same as in a stock mutual fund. You need to have a Plan B in mind in case your chosen mutual fund takes a longer time than expected to return the 10% gain that you want to use to trigger profit-taking and investment of the gain into a low-risk bond fund, and also maybe a Plan C in case the vagaries of the market cause your chosen mutual fund to have negative return for some time. What is the exit strategy? "Of course. ""Best"" is a subjective term. However relying on the resources of the larger institutions by pooling with them will definitely reduce your own burden with regards to the research and keeping track. So yes, investing in mutual funds and ETFs is a very sound strategy. It would be better to diversify, and not to invest all your money in one fund, or in one industry/area. That said, there are more than enough individuals who do their own research and stock picking and invest, with various degrees of success, in individual securities. Some also employe more advanced strategies such as leveraging, options, futures, margins, etc. These advance strategies come at a greater risk, but may bring a greater rewards as well. So the answer to the question in the subject line is YES. For all the rest - there's no one right or wrong answer, it depends greatly on your abilities, time, risk tolerance, cash available to invest, etc etc."