Investing Time Factor

• The type of mutual fund right for you largely depends on when you will need your money. A general rule of investing is that the riskier the investment, the higher the return it pays. However, the longer your investment time frame is, the more risk is reduced. For example, stocks are considered one of the riskier types of investments over a short period of time, but over time, stocks outperform all other investment classes and provide reliable returns.
  
  

Stock Funds

• If you will not need the money you invest for at least the next five years, you can afford to invest more aggressively. According to data provided by New York University, stocks have earned investors, on average, more than 11 percent per year since 1928. Investing in stock funds offers an opportunity for your long-term investments to grow more quickly than other fund types.
  
  

Fixed-Income Investing

• Fixed-income funds invest in bonds and other types of securities that pay periodic interest. When you buy a bond, you become a lender to the organization that issued the bond. The face value of the bond is guaranteed, meaning the bond issuer is obligated to pay you the price the bond was originally issued at when it reaches maturity. In addition, the issuer agrees to pay you interest for your loan two times per year. Bonds have historically earned investors over 5 percent per year. Bond prices are more stable over short periods of time than stocks, so fixed-income funds offer investors with shorter time frames a relatively safe place to invest their money.
  
  

Balanced Funds

• If you want to earn higher returns than bond funds, but do not want to be fully exposed to the type of short-term risk that is engendered by a stock fund, balanced funds offer an alternative. A balanced fund invests in a basket of both stocks and bonds in order to earn higher returns than bond funds, but maintain better price stability than stock funds.