1. How can i set up masternodes (I tried to do a research and watching online but I'm still confused)
This is different from coin to coin. The best way to test it out is to search for a coin which has maternodes and a active testnet. Then you can just ask for coins on the testnet (they do not have any worth) and create a test setup.
2. Do I need to have a VPS in order to create a node?
No, but it is probably recommended. You don't know which kind of software you are executing, even if it's open source. Not every new altcoin is reviewed.
3. What does the VPS do in regards with setting up node?
VPS stand for Virtual Private Server and is in the most cases just a separated Environment (An Operating System on Shared Hardware Resources) on a server.
4. Is it risky? Or atleast may I know what are the risk I will face when I setup a node?
Yes, could be. There are also many scams and they can infect your computer with malware.