It is not possible to avoid risk when investing in mutual funds, the Securities and Exchange Commission advises. Mutual funds are not insured by the Federal Deposit Insurance Corporation and therefore carry the potential for losses.
Investors may be inclined to judge a mutual fund's potential for risk based on its past performance. Past performance is not an indicator of future performance, as the SEC warns. Investors should also consider any fees associated with a fund before investing.
A mutual fund represents a portfolio of diversified investments in stocks, bonds and other financial instruments. This diversification can lessen risk somewhat but is no guarantee against losses, the SEC explains.