You invest to hopefully make a profit. Mutual fund managers do the same. There are basically three ways that your investment can bring your rewards.

First, you can realize a profit from your mutual funds if the value of your shares (your piece of the portfolio) goes up. At the close of the market every day, the share value is recalculated. The assets of a fund are totaled and divided by the number of outstanding shares to determine the closing price per share. This price is called the net asset value (NAV) per share, and it's what you can sell your shares for. If you can sell your shares for more than you paid, then you have made a profit. Of course, if you don't intend to sell your shares, then your profit is only on paper.

Second, you can realize a profit from your mutual funds when you receive dividends, or earnings paid to shareholders by various stock companies. If funds you own earn dividends, you can choose to take the cash (part of your profit) or you can choose to reinvest your dividends and buy more shares.

Third, you can realize a profit from your mutual funds if you receive capital gains distributions, paid by the investment company while you own shares. When a fund manager sells shares of companies, there may be a profit (or loss) on the sale. Usually at the end of the year, the manager totals gains and losses from the prior 12 months to determine if there are net capital gains. Any gains are then paid to fund shareholders, or they can be reinvested by buying additional shares.

What's the risk?
Mutual funds offer no guarantees, so investing in them involves some risk. There are three basic risks associated with mutual fund investing. First, there is a definite risk of losing money, at least in the short term. Even bonds, which are touted as a fairly safe investment, can lose money if interest rates rise. Remember that the goal of investing is to make money over time, preferably over a long time, so fluctuations in the value of your investment should be expected and should not cause you to panic. Second, if you invest too safely, there is a possibility that you will not earn enough to outpace inflation. For example, if the rate of inflation for the year is 4% and you earn 4%, then basically you made nothing. Increasing risk can yield a higher return, and beat inflation, but this involves accepting more risk in your investing. Third, and the most important risk, is the possibility of not achieving your retirement goal. Again, if you seek investments that have little risk, then the respective return will also be small. You must find the balance between acceptable risk and reward so that you earn enough return to achieve your goal.

Use dollar-cost averaging to mitigate your risk
Lots of people think that they must have lots of money to invest, but the truth is just the opposite. Did you know that you can start an automatic investing plan for as little as $50 a month (a few even accept as little as $25 a month)? This allows anyone to get started investing today. The good news? Lots of people like to wait until the end of the tax year and then use part of their refund to invest in their IRAs. However, the best choice is to invest every month over the course of the year. This allows you to take advantage of a strategy called dollar-cost averaging which actually reduces risk and can potentially improve your returns. Each month when you invest, your money buys a certain number of shares at the going rate. If the market takes a dive over the next month, your next installment actually buys more shares at the new lower price, helping to offset the loss from the previous month. If you had dumped your entire annual allotment the previous month, you would lost a certain percentage of all of it. To see how dollar-cost averaging actually works to your benefit in reducing risk, visit Investing for Beginners.