Since all financial investments carry a risk of loss in the value of principal, a mutual fund that you choose should correspond to your risk tolerance. 

Your risk tolerance will probably vary throughout the different stages of your life. As an investor, you should factor your age, income requirements, financial goals, etc. There are five risk tolerance categories:

• conservative 
• moderately conservative
• moderate 
• moderately aggressive 
• aggressive

Risk Tolerance Factors:

Time: What is your time horizon — how much time do you have to reach your financial goal, such as retirement? Generally, the younger you are, the more risk you may be willing to assume. As you get older your risk tolerance will generally shift from aggressive to conservative. 

Human capital: What is your earning power and how much can you afford to invest? Typically, the more money available, the likelier you will choose aggressive investments. The less money you may have available, the less willing you may be to assume risk. Consider your job security and how it may affect your income stream. The steadier your income, the more risk you may be willing to take. 

Financial responsibilities: How many dependents do you have? If you are single and have no dependents, you may be able to afford greater risk than a parent who is the sole income provider to a family.

Other resources: What other income sources do you have available? These may include: inheritance, trust funds, pensions, spousal assets, or family businesses. The more resources you have available, the more funds you may be able to risk. Also, look at how much funding these resources can provide, their liquidity features, tax and retirement implications. 

Emotional makeup: How do you react to change? Emotional responses generally result in poor investment decisions. If you are less able to cope with change, you may prefer a lower-risk portfolio. If, however, the day-to-day volatility of the market does not worry you, then you may be interested in a higher-risk portfolio.