Mutual Funds

A mutual fund is an investment company that pools the money of investors to purchase securities based on specific investment goal or strategy. By investing in the fund, you'll own a piece of the total portfolio of securities, which could be anywhere from a few dozen to hundreds of stocks. This provides you with a convenient way to obtain instant diversification that would be harder to achieve on your own.
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Types of Mutual Funds

There are many mutual funds to choose from but only a few major fund categories. The two most common types are Stock Mutual Funds and Bond Mutual Funds.

Stock Funds

A stock fund invests in common stocks issued by U.S. and/or international companies. Some stock mutual funds buy stocks in companies believed to have potential for long-term growth in share price and there are some funds specializing in stocks of particular segments of the economy such as healthcare. Other stock mutual funds look for stocks that pay dividends or stocks based on the size of the company such as small-cap, mid-cap, or large-cap stock funds

There are many individual funds with a variety of investment objectives and goals and the fund prospectus contains information about the kind of investment style that the manager(s) employ, and the kinds of stocks that the fund will buy.

Bond Funds

A bond fund is made up of debt instruments that governments or corporations issue to raise capital. They are designed to provide investors with interest income in the form of regularly scheduled dividends. Buying shares of a bond fund relieves you of the concern of individual bond maturity dates and fund reinvestment. The fund manager of your particular fund handles this for you.

  • Corporate, agency, or municipal bond funds focus on bonds from a single type of issuer, across a range of different maturities.
  • Short-term or intermediate-term bond funds focus on short- or intermediate-term bonds from a wide variety of issuers.
  • Treasury bond funds invest in Treasury issues.
  • High-yield bond funds invest in lower-rated bonds with higher coupon rates.

Two other common fund categories are Balanced Funds which invest in a combination of stocks and bonds and Money Market Funds which invest in short-term debt. [1]

Benefits of Mutual Fund Investing

  • Diversification: Most mutual funds own dozens or even hundreds of securities exposing you to less potential risk than buying individual securities. (Note: diversification cannot guarantee a profit or ensure against a loss).
  • Professional money management: Analyzes hundreds of securities and makes decisions on what and when to buy and sell.
  • Flexible investment amounts: Depending on fund rules, you can make contributions with a very small initial investment.
  • Liquidity: You can convert your mutual fund investment into cash (i.e., redeem your shares)

Considerations Before Investing

When choosing a mutual fund, the most important factors to consider are:

  • Your investment objectives, risk tolerance, and time horizon.
  • Review the fund prospectus for information such as the fund's investment objective and style, and the fund's expenses. To get a prospectus, contact the mutual fund company directly, or go on-line to the company's website to download one.
  • Mutual Fund Fees - Some fees are charged at specific times, based on actions you take, and some are charged on an ongoing basis. Fees are described in detail in each fund's prospectus, which you should be sure to read before investing in any fund.
  • Consider a mutual fund's other fees and expenses such as the expense ratio. The expense ratio is calculated by dividing the fund's annual expenses by the fund's average net assets. A high expense ratio affects a fund's net return.
  • Mutual funds are not guaranteed investments. The price of all mutual fund shares can change daily, and you will receive the current value of your shares when you sell--which may be more or less than you paid. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investing strategy will be successful.
  • Like investing in any security, investing in a mutual fund involves certain risks, including the possibility that you may lose money. You can find all of the details about a mutual fund including its investment strategy, risk profile, performance history, management, and fees—in a document called the prospectus. You should always read the prospectus before investing in a fund.
[1] Although considered an alternative to a bank savings account, an investment in Money Market Funds is not insured or guaranteed by the FDIC or any other governmental agency. Although the Funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Funds.