Investing in mutual funds and common stocks has its risks and rewards. Generally speaking, when investing in mutual funds, risk and reward are directly related.
The more risk you're willing to take, the greater your potential reward. The less risky the investment, the less return you will receive. In a very real sense, the risk is not so much that you will lose money; it's more that you will not make the return you should with a reasonable risk.
The least risky type of mutual fund investment is the money market fund, which pays a varying rate of interest on your money. You generally know about how much your fund will return, and there isn't a lot of risk.
There is less risk involved in a money market fund than in just about any other type. However, while you don't have to worry so much about losing money in a money market fund (the recent financial crisis being an exception), the fund may not produce enough reward for you to meet your long-term financial goals.
To receive a higher financial reward for investing your money, you need to take on additional risk.
Short- and intermediate-term bond funds offer more reward, but with slightly more risk than money market funds. Long-term bond funds and balanced funds are moderately risky and offer more rewards than short and intermediate bond funds.
Moving up to a higher risk and higher reward are growth and income stock funds followed by growth stock funds and aggressive-growth stock funds.
History has shown that investing in stocks whether directly or through mutual funds has rewarded investors with higher returns than investments in bonds, money market funds, or cash.
Before you invest, determine how much risk you are willing to take to reach your objectives. The further away those objectives are in time, the more risk you can assume in your investments.
If, for example, you're investing for retirement and have 10, 20, or more years to go, you can choose more aggressive investments with potential high returns over time. Volatility is not a risk to the long-term investor. The market's bias toward growth overcomes volatility with time.
Risk & Fund Types
Your appetite for risk should directly correlate with the types of mutual funds that you invest in. It wouldn't make sense for conservative investors to put all their savings in an aggressive-growth fund.
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The more risk you're willing to take, the greater your potential reward. The less risky the investment, the less return you will receive. In a very real sense, the risk is not so much that you will lose money; it's more that you will not make the return you should with a reasonable risk.
The least risky type of mutual fund investment is the money market fund, which pays a varying rate of interest on your money. You generally know about how much your fund will return, and there isn't a lot of risk.
There is less risk involved in a money market fund than in just about any other type. However, while you don't have to worry so much about losing money in a money market fund (the recent financial crisis being an exception), the fund may not produce enough reward for you to meet your long-term financial goals.
To receive a higher financial reward for investing your money, you need to take on additional risk.
Short- and intermediate-term bond funds offer more reward, but with slightly more risk than money market funds. Long-term bond funds and balanced funds are moderately risky and offer more rewards than short and intermediate bond funds.
Moving up to a higher risk and higher reward are growth and income stock funds followed by growth stock funds and aggressive-growth stock funds.
History has shown that investing in stocks whether directly or through mutual funds has rewarded investors with higher returns than investments in bonds, money market funds, or cash.
Before you invest, determine how much risk you are willing to take to reach your objectives. The further away those objectives are in time, the more risk you can assume in your investments.
If, for example, you're investing for retirement and have 10, 20, or more years to go, you can choose more aggressive investments with potential high returns over time. Volatility is not a risk to the long-term investor. The market's bias toward growth overcomes volatility with time.
Risk & Fund Types
Your appetite for risk should directly correlate with the types of mutual funds that you invest in. It wouldn't make sense for conservative investors to put all their savings in an aggressive-growth fund.
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