In the world of investment risk, the good news is that mutual funds are a relatively safe bet when compared to other investment options. That being said, however, risk varies among different funds, and funds are still subject to market fluctuations.

Mutual funds, as a rule, are not as volatile as a single stock because they are made up of a number of stocks. Even in a market crash some of the stocks will stay afloat, although the funds’ per share price will drop. The balance tends to offset losers with winners, particularly since the market has always fared well over time. The more aggressive the fund (the more risky), the more volatile the fund will be. Don’t be fooled by short-term pluses and minuses. Once you have looked at the track record of a mutual fund and have seen that the fund you’ve chosen has performed well over one, three, and five years, you should anticipate investing for at least three to five years.

Greater risk means greater volatility. It also means you need more perseverance, as most funds will recover. If, however, your fund is experiencing volatility because of a change in managers or the direction the fund is taking, then you may want to investigate more thoroughly who is at the helm of the ship and what direction the mutual fund is not taking. There are several reasons a fund may be volatile: fluctuations in the stock market; changing interest rates (particularly pertaining to bonds); foreign currency rates; and fund management. Also, a fund that is actively buying and selling more heavily will often be more volatile. Look to see if similar funds, in the same category, are also experiencing similar volatility. Returning to the notion that a rising tide raises all ships, you may simply find that the volatility of your fund is typical for that type of fund at the present time. If, however, your fund is acting differently from similar funds, look more closely at the management.

In general, whatever the reason, short-term volatility is not at all uncommon for mutual funds. While you can lose money, the odds are strongly in your favor that the fund will bounce back if you hold onto it over time, particularly if it is a domestic-based equity fund.

That's what history has shown in the past.