Investment Pyramid Strategy

                Mutual fund Higher To lower Risk Fund Type

Investment Pyramid

A Mutual Fund

is a company that combines the investment funds of many people with similar investment goals and invests the funds for these people in a wide variety of securities. The individual receives shares of stock in the mutual fund and through the mutual fund are able to enjoy much wider investment diversity than they could otherwise receive. Each shareholder, in effect, owns a part of a diversified portfolio that has been acquired with the pooled money. As the securities held by the fund move up or down in price, the market value of the mutual fund shares moves accordingly. When dividend and interest payments are received by the fund, they are passed on to the mutual fund shareholders and distributed on the basis of prorated ownership.

The above is a simple non technical chart of Mutual Fund categories by risk and reward. It should help you understand some basics of risk and reward. This is not an exact science, this chart is not intended to be 100% accurate. At the top of the pyramid an individual can expect the greatest returns but because of the risk associated with these funds an individual will also experience the greatest risk of loss. Consequently, with the funds at the bottom of the pyramid an individual can expect low returns with the lowest risk of loss of investment. Volatility is the key. If an individual knew exactly when to invest in these funds and exactly when to sell these funds he or she would be able to maximize his or her return.

Pyramid Strategy

Before moving up the pyramid and taking on more risk you should "cover your basics first". That's why treasury instruments and insured deposits are shown first. Bonds are included next since, historically, they are less volatile than stock- meaning their returns do not fluctuate as greatly, however, past performance does not guarantee future recurrence or results. Basic stock index funds are usually next in line followed by more aggressive positions until you reach the top and are involved in speculative investments.

As a general guide, you should put part of your money in the safer areas first before investing in more risky investments. If you are young and the more money you make, and if you have few or no dependents, theoretically you can take on more risk. You have more time to recoup your losses. Consequently, as you get older you should reduce your risk exposure because there is less time to make up losses. However, you should never make an investment unless you clearly know what you are investing in.