Reference Library

Investment Planning

Mutual Funds

What are mutual funds?

In today's complex financial marketplace, mutual funds offer investors a simpler, more convenient and less time-consuming method of investing in a portfolio of securities (like stocks and bonds) than trading them individually. Through mutual funds, investors can delegate investment decisions to the fund's professional money managers and gain greater access to a broad variety of securities than they could investing on their own.

Mutual fund investors select a fund with an investment objective that most closely matches their own. For example, they may want to maximize their current income, maximize the long-term growth of their capital, or they may want a combination of income and growth.

The mutual fund pools the money of investors who have similar objectives. Professional money managers then use these pooled monies to buy a wide range of stocks, bonds or money market instruments that, in the manager's judgment, will help the investors achieve their objectives. Together, these securities form the underlying investment portfolio of the fund.

An investor in mutual funds is buying shares of the fund. Each share represents ownership in all the funds' underlying securities. Dividends and capital gains produced by these securities are paid out in proportion to the number of fund shares owned. Alternatively, investors may elect to have their dividends and capital gains automatically reinvested in the purchase of additional shares.

Mutual Funds Offer Many Advantages

Liquidity

Mutual fund investors can cash in all or part of their shares at any time and receive the current net asset value of their investment, which may be more or less than the original cost. They do not need to find a buyer; the fund is always ready to buy back (redeem) its shares.

Current per-share values are calculated daily based on the market worth of the underlying securities. These values change as the values of the underlying securities move up or down and as the fund changes its portfolio by buying new securities or selling existing ones. Investors can find the per-share calculations (knows as "net asset values") published each day in the financial sections of most major newspapers.

Diversification*

Mutual funds provide a degree of diversification that individuals simply can't get on their own. By distributing the pool of shareholder dollars across dozens of securities, the mutual fund can diversify its holdings. A diversified portfolio may reduce risk should some investments turn sour and may increase the chance of picking up potential winners. The average investor would find it difficult to amass a portfolio as diversified as that of a mutual fund.

*There is no assurance that a diversified portfolio will produce better results than an undiversified portfolio, nor does diversification assure against market loss.

Choice

There's a fund to fit every investor need. A mutual fund investor has more options than ever before — there are literally thousands of stock, bond and money market funds available — enough to satisfy all levels of risk tolerance, from the most conservative to the most venturesome.

In addition, specialized funds are available — for instance, those that invest only in certain geographic regions or in certain sectors or industries (like health care, technology or energy). There are even funds that have adopted certain social objectives or that follow specific investment philosophies.

Flexibility

While some investors prefer to pick a single fund and stick with it, others look for a "family" of funds — several different funds available from one fund company. In a family, investors can generally transfer portions of their investments into other funds with different objectives as their own needs or financial circumstances change.

Regulation

The U.S. Securities and Exchange Commission (SEC) regulates all mutual funds. As part of this regulation, all funds must provide a "prospectus" to every investor. This document describes the fund including its investment objectives and fees. It also outlines all fees. In addition, mutual funds are regulated under four federal laws and myriad state laws designed to protect investors who assume the risks inherent in investing in securities.

Professional Management

A professional money manager determines which securities to buy and sell based on extensive ongoing research of economic and market conditions and the financial performance of individual companies. After analyzing all this data, the manager chooses investments that best match the fund's objectives. As economic conditions change, the fund may adjust the mix of its investments to adopt a more aggressive or a more defensive posture.

Professional money management has long been available to large institutions and wealth investors. Mutual funds make this kind of financial knowledge accessible to everyone.

Recordkeeping

All funds are required to provide their shareholders with periodic reports on what the fund is doing and what is happening to its investments. In addition, the investor receives a yearly statement detailing the federal tax status of his or her earnings from the fund. Dividends and capital gains are treated substantially as if the investors had bought and sold the underlying securities themselves.

*There is no assurance that a diversified portfolio will produce better returns than an undiversified portfolio, nor does diversification assure against market loss. An investment concentrated in sectors and industries may involve greater risk and volatility than a more diversified investment. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline, and, therefore, the value of the Fund shares may be less than what you paid for them. Accordingly, you can lose money investing a Fund.

A prospectus/summary prospectus contains more complete information. Consider the investment objectives, charges, expenses, share classes, and risks of the investment company carefully before you invest or send money.

A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchase throughout periods of fluctuating price levels.