Money market mutual funds are a relatively low-risk mutual fund investment that offers lower returns. Money market mutual funds can only be invested in certain short term, high quality investments issued by the US government, state and local governments, banks and blue-chip companies. Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although unlikely, it is possible to lose money with money market mutual funds. They are not generally recommended as investments for 100 percent of your retirement money unless you are very close to retirement age.

Bond mutual funds typically invest in government or corporate bonds, or a combination of both. Government bond mutual funds can invest in U.S. Government, state government, or local government bonds. Corporate bond mutual funds invest in a variety of bonds from companies across the country or around the world. Bond mutual funds are subject to the performance of the bonds in their portfolio, and risk varies according to investment strategy. Generally, funds holding bonds with longer average-maturity periods have higher yield potential and higher risk. Bond mutual funds with a shorter average maturity are generally lower risk investments. Overall, bond mutual funds are low-to moderate-risk investments, with a few categorized on the high-risk side.

Independent agencies such as Standard & Poor’s and Moody’s rate bonds in the marketplace according to default risk. Scales differ, but ratings generally run from AAA (high quality), down to C (lowest quality), or D (in default). Examine the ratings of the bonds in any mutual fund you are considering for investment.

Stock mutual funds are usually invested in various publicly traded stocks. A stock mutual fund’s value can rise or fall quickly over the short term; historically, though, stocks as reflected in the performance of stock market indices (which do not have investment management fees and other expenses) have performed better over the long term.

There is no guarantee, however, that any particular stock or group of stocks will perform better over the long term than other types of investments. Stock prices fluctuate for a wide range of reasons, and stock mutual funds are subject to the same market risk as stocks. Not all stock mutual funds are the same or have the same level of risk. Most stock mutual funds fall into one or more of the following categories.

• Index mutual funds attempt to mirror the performance of stock market indexes, such as the Dow Jones Industrial Average or the Standard & Poor’s 500 Composite Stock Price Index (S&P 500). They do this by investing in all (or a representative sample) of the companies included in the index. Investing in an index mutual fund reduces the risk that the fund portfolio will be subject to poor investment decisions. The downside to these mutual funds is that they’re managed for average performance, so they rarely perform significantly better than the market in general.
• Growth mutual funds invest in companies that have better than-average growth potential over time. The earnings of these companies, and therefore their stock values, are expected to increase. Growth mutual fund investments span a broad range of industries, and may or may not pay dividends. Growth funds are considered higher risk, so expect significant fluctuation in share price.
• Income mutual funds invest in stocks that have a history of paying regular dividends.
• Growth and Income mutual funds generally invest in companies believed to have growth potential and a solid dividend payment record. They’re designed to help you hedge your bets—even if the share price falls, dividends may offset the loss. Growth and income fall in the middle of the risk spectrum for stock mutual funds.
• Aggressive Growth mutual fund portfolios include stocks of start-up companies, smaller businesses or firms in high-risk industries. These stocks may be volatile and should be purchased by those with a higher risk tolerance.
• International mutual funds generally invest in stocks or bonds of non-U.S. issuers. Investors in these funds are taking on a high degree of risk, since the portfolios could be affected by political unrest or currency fluctuations in a foreign country. Often, international mutual funds invest in companies from emerging markets where business is rapidly developing (e.g. Latin America). The potential risks and rewards are very high.

Balanced mutual funds are invested in a mix of stocks and bonds, allowing diversification with potentially lower risks, and lower return potential, than pure stock funds.