Risk vs. Reward

When you invest in a mutual fund, there is no guarantee that you will end up with more money when you withdraw your investment than what you invested to begin with—and that’s a scary prospect. Loss of value in your investment is what is considered risk in investing. Even so, the opportunity for investment growth that is possible through investments in mutual funds far exceeds that concern for most investors.

At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the potential reward.

Risk then, refers to the volatility -- the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors -- interest rate changes, inflation or general economic conditions. Different types of mutual funds have different levels of volatility or potential price change, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. Mutual funds offer incredible flexibility in managing investment risk. Diversification and automatic investing are two key techniques you can use to reduce your investment risk considerably -- and help reach your long-term financial goals.

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