Mutual Funds





Mutual Funds

Mutual funds are an attractive method of investing for some. A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other securities. The combined holdings of stocks, bonds, or other securities and assets the fund owns are known as its portfolio. Each investor owns shares, which represent a part of these holdings.

Investors in mutual funds prefer them because:

-- Mutual funds are managed by professional money managers.

-- By owning shares in a mutual fund instead of buying individual stocks or bonds directly, your investment risk is spread out.

-- Because your mutual fund buys and sells large amounts of securities at a time, its costs are often lower than what you would pay on your own.

You take risks when you invest in any mutual fund. You may lose some or all of the money you invest, because the securities held by a fund go up and down in value. What you earn on your investment also may go up or down. Be aware that:

-- Mutual funds are NOT guaranteed or insured by any bank or government agency. Even if you buy through a bank and the fund carries the bank's name, there is no guarantee. You can lose money.

-- Mutual funds ALWAYS carry investment risks. Some types carry more risk than others.

-- Understand that a higher rate of return typically involves a higher risk of loss.

-- Past performance is not a reliable indicator of future performance. Beware of dazzling performance claims.

-- ALL mutual funds have costs that lower your investment returns.

-- You can buy some mutual funds by contacting them directly. Others are sold mainly through brokers, banks, financial planners, or insurance agents. If you buy through these financial professionals, you generally will pay an extra sales charge for the benefit of their advice.

-- Shop around. Compare a mutual fund with others of the same type before you buy.

The three main categories of mutual funds are money market funds, bond funds, and stock funds. There are a variety of types within each category.

Money Market Funds have relatively low risks, compared to other mutual funds. They are limited by law to certain high-quality, short-term investments. Money market funds try to keep their value at a stable, low per share price, but their value may fall if their investments perform poorly. Investor losses have been rare, but they are possible.

Bond Funds (also called Fixed Income Funds) have higher risks than money market funds, but seek to pay higher yields. Unlike money market funds, bond funds are not restricted to high-quality or short-term investments. Because there are many different types of bonds, bond funds can vary dramatically in their risks and rewards.

Most bond funds have credit risk, which is the risk that companies or other issuers whose bonds are owned by the fund may fail to pay their debts (including the debt owed to holders of their bonds). Some funds have little credit risk, such as those that invest in insured bonds or U.S. Treasury bonds. But be careful: nearly all bond funds have interest rate risk, which means that the market value of the bonds they hold will go down when interest rates go up. Because of this, you can lose money in any bond fund, including those that invest only in insured bonds or Treasury bonds.

Long-term bond funds invest in bonds with longer maturities. The values of long-term bond funds can go up or down more rapidly than those of shorter-term bond funds.

Stock Funds (also called Equity Funds) generally involve more risk than money market or bond funds, but they also can offer the highest returns. A stock fund's value can rise and fall quickly over the short term, but historically stocks have performed better over the long term than other types of investments.

Not all stock funds are the same. For example, growth funds focus on stocks that may not pay a regular dividend but have the potential for large capital gains. Others specialize in a particular industry segment such as technology stocks.

Each kind of mutual fund has different risks and rewards. Generally, the higher the potential return, the higher the risk of loss.

There are sources of information that you should consult before you invest in mutual funds. The most important of these is the prospectus of any fund you are considering. The prospectus is the fund's selling document and contains information about costs, risks, past performance, and the fund's investment goals. Request a prospectus from a fund, or from a financial professional if you are using one. Read the prospectus before you invest.

You can buy some mutual funds by contacting them directly. Others are sold mainly through brokers, banks, financial planners, or insurance agents. All mutual funds will redeem (buy back) your shares on any business day and must send you the payment within seven days. Before you buy a mutual fund, make sure it is right for you.

Before you invest, decide whether the goals and risks of any fund you are considering are a good fit for you. To make this decision, you may need the help of a financial adviser. There are also investment books and services to guide you.