Can investing in mutual funds be risky?

Certainly any investment carries the risk that you may lose money, and mutual funds are subject to risk. Mutual funds, unlike bank savings accounts and certificates of deposit (CDs), are not insured by the federal government. Mutual fund prices fluctuate with changes in the financial markets, and may go up or down in value like any stock. It is important to look at mutual fund investments with a view toward the long term, as staying invested over longer periods can reduce the impact of short term fluctuations.

Mutual funds may also offer several advantages in terms of managing risk. As previously discussed, mutual funds are diversified among many securities to mitigate the risk associated with any single holding. They are also highly liquid, and investors can generally redeem shares at any time for the current market value. Significantly, the mutual fund business is one of the most highly regulated in the United States, and the SEC carries out regular audits of mutual fund companies. 

Independent directors oversee funds’ activities, while independent auditors scrutinize their financial statements and major financial institutions maintain custody of fund assets. Shareholder reports and other communications, as well as marketing materials, are reviewed by the National Association of Securities Dealers (NASD).