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.