Risk and reward of investment funds

Investing in mutual funds and common stock has its risks and benefits. In general, when investing in mutual funds, risk and reward are directly linked.

The more risk you are willing to take, the greater your potential reward. The less risky investment, the less return you get. In a very real sense, the risk is not so much that you will lose money; it is more that you do not come with the return you need at a reasonable risk.

The least risky type of guarantee investment return fund is the money market fund, which pays a variable interest on your money. You generally know how much your department will return and there is not much risk.

There is less risk involved in a money market fund than in almost any other type. While you don't have to worry so much about losing money in a money market fund (the recent financial crisis is an exception), the fund may not produce enough rewards to help you meet your long-term financial goals.

To receive a higher financial reward for investing your money, you have to take on an additional risk.

Short-term and medium-term bond funds offer more rewards, but with a little more risk than money market funds. Long-term bond funds and balanced funds are moderately risky and offer more benefits than short and intermediate bonds.

Moving up to a higher risk and higher rewards are growth and income holding funds, followed by growth stocks and aggressive growth equity funds.

History has shown that investing in shares either directly or through mutual funds has rewarded investors with higher returns than investments in bonds, money market funds or cash.

Before investing, determine how much risk you are willing to take to achieve your goals. The further away these goals are in time, the more risk you can take in your investments.

For example, if you invest in retirement and have 10, 20 or more years to go, you can opt for more aggressive investments with potentially high returns over time. Volatility is not a risk to the long-term investor. Market bias against growth overcomes volatility over time.

Risk and fund types

Your appetite for risk should directly correlate with the types of mutual funds you invest in. It wouldn't make sense for conservative investors to put all their savings into a fund with aggressive growth.

Because the distinctions between types of funds have become more and more blurred over the last few years, you can't assume that a fund is actually what it bills itself to be.

That is, a fund with the word "balanced" in its name may not be a balanced fund in the truest sense of the term. Therefore, you must carefully examine the fund's prospectus and register before investing.

We recommend that you investigate the Fund's basic data to learn more about those who care about you. Maybe check out a mutual newsletter to gather more information. By examining a fund's portfolio and dividing its assets between stocks, bonds and cash, you can usually determine whether a fund is following its stated goals.

If the balanced fund you are interested in actually invests 50% of its assets in small cap foreign stocks, you will know that it is not really a balanced fund, but rather a global capital with aggressive growth.