The best mutual fund investment strategy for most people reduces risk and gives the investor plenty of flexibility. Here's how to set yourself up to invest money so you don't need to worry when the investment environment turns ugly.

We'll use Jack as our example. He's afraid of losing money, but at the same time wants to earn higher returns than he can get from his bank. A moderate risk, at most, he will accept. Jack is also frugal, and hates to pay fees to invest money. He has a savings account at the bank he adds to regularly.

His best investment strategy, according to his brother Jim whom he trusts, involves opening a mutual fund account with a major no-load fund company. This is where you get the best mutual fund investment bang for your buck, according to Jim, because the cost of investing is low. Plus, with a mutual fund investment you get professional management as part of the package.

Once his account is set up Jack will invest money systematically into four different mutual funds: a money market fund, a short-term bond fund, an intermediate-term bond fund, and a large-cap U.S. stock fund. To lower the cost of investing even more, the stock fund and bond funds will be index funds.

Remember, Jack is risk conscious. So, here's how they set things up. Jack opens his mutual fund account by putting a few thousand dollars into a money market fund, where he has high safety and earns interest in the form of dividends. Plus, this gives him added flexibility in managing his account.

They set it up so that every month a few hundred dollars will flow from his bank account to his money market fund, which will be used as his cash reservoir. Then, Jack instructs the mutual fund company to have money flowing each month (equal amounts) into his three other funds (his investment funds) from the money market fund.

This is his best mutual fund investment strategy and it gives Jack plenty of flexibility. If he wants to add extra money, he sends it into the money market fund without interrupting his investment strategy. If he wants to take some money out, he takes it from there as well. He has the flexibility to change the amount of money that flows from his bank account and/or that flows into his various funds.

In the beginning he should have equal amounts invested in each of his three investment funds fed by the money fund. Over time this will change as all three will perform differently. The short-term bond fund is the safest of the three, paying higher dividends than the money market fund but less than the intermediate bond fund. It should not fluctuate much in price.

At the other extreme, the stock fund is the riskiest and it has good growth potential. The value of this mutual fund investment will fluctuate considerably.

To keep risk at bay, once a year Jack will rebalance his portfolio as part of his investment strategy. He wants to keep his stock fund and two bond funds approximately equal in value. To do this he simply moves money around between these three funds.

His money market fund is simply his cash reservoir, and it gives him added flexibility. The other three funds provide higher interest income and growth (the stock fund).

This investment strategy is especially attractive in a tax-deferred or tax-free account like a traditional or Roth IRA, because income taxes are not an issue until money is withdrawn from the account.