What Are Mutual Funds?

Because mutual funds typically hold a large number of securities, their level of diversification provides them with a lower level of risk than investing in a single stock or bond. However, investing in mutual funds still contains a number of risks that you should consider before investing, including:

• You could lose money.
• Your money may lose buying power (inflation risk).
• You may not achieve your goal. This risk is often overlooked because many investors fail to set goals or set unrealistic goals. For example, if you are investing to pay for a college education, a money market fund might feel safe, but it's unlikely that you'll reach your goal.
• Your investment may rise and fall in value -- the price of an investment is likely to rise and fall over time. Seasoned investors try to ride out the ups and downs in their investments. That's because over the long term most investment tend to rise in price. Market risk, however, can place you at a significant disadvantage if you need to sell at a time when prices happen to be down.
• Foreign exchange or currency risk. If you invest overseas, the exchange rate between your home currency and the foreign currency adds an extra layer of risk to your investment. The stock or bond you buy may go up, but the exchange rate may go down so far that it wipes out your gain.

Take Action

• Use a mutual fund screener to find low-fee mutual funds.
• Learn about mutual fund risk measures.
• AARP's Money Matters Tip Sheet on Investing in Mutual Funds has more information and action steps. 

All the information presented on AARP.org is for educational and resource purposes only. We suggest that you consult with your financial or tax adviser with regard to your individual situation. Use of the information contained in this Web site is at the sole choice and risk of the reader.