Stock funds tend to have higher risk and in turn offer the potential for a higher return; they fluctuate in price as the economy waxes and wanes. In the long run, investors may find themselves rewarded for putting up with the volatility. That's why mutual funds that invest in the stock market are often attractive to investors who are putting aside money for retirement and other long-term goals.
A share of stock generates a return for investors two ways. First, if the company grows and makes money, then the share price is likely to go up. The increase in share price is known as the capital gain. On top of that, many companies pay out a small amount of profits to shareholders each year. The payment is known as a dividend.
Some stock funds are managed to maximize dividend income, some to maximize the amount of capital gains, and some to get the best mix of both (known as total return). In general, more investment income could mean less risk. Likewise, some stock mutual funds invest in a broad mix of companies, while others may concentrate only on small companies, international companies, or companies in certain sectors such as technology or energy.
All stock funds bear some level of market risk, but they may be a good choice for long-term investors who can tolerate the intermediate ups and downs on the way to their goals.