About Mutual Funds

Professional Money Management

Mutual funds provide the benefit of full-time investment management expertise and recordkeeping services. Fund investors’ own shares in a diversified, professionally managed portfolio that most investors could not afford to create.

Diversification

A mutual fund is required to be diversified. Its assets are invested in many different securities. This reduces the exposure to individual security risk by spreading risk across many different securities. In addition to the diversification inside a mutual fund, mutual fund investors manage risk by purchasing mutual funds with different objectives. A balanced portfolio of different asset classes (stocks, bonds, real estate and commodities) and categories within an asset classes (value vs. growth stocks, or government vs. corporate bonds) is a risk management strategy.

Affordability

Minimum investment requirements and subsequent investment minimums are low enough on some mutual funds that most anyone can invest.  Plus, you have access to types of investments not always available for small investment amounts.

Convenience and Accessibility

Mutual funds may be purchased directly from a fund company, through a financial advisor, through an employer-sponsored retirement plan or from a fund supermarket. Each share purchased represents a widely diversified portfolio of investments, professionally managed for you.

Liquidity

Mutual fund shares may be redeemed at the closing price any day the financial markets are open. Some funds, especially international funds, charge redemption fees to discourage short-term trading. You may have your proceeds sent by wire, electronic transfer or check.

Types of Funds and Features

While the core features of mutual funds are the same, their investment objectives can be very different. Because each mutual fund has a specific investment objective, such as growth, capital preservation, or income, it is important to understand which funds are designed to meet your investment objectives. Mutual funds generally fall into these main categories:

  • Stock or Equity Funds invest in the ownership of companies through stocks.
  • Bond or Fixed-Income Funds invest in government or corporate debt to generate income.
  • Money Market Funds invest in short-term debt, pay interest and target a stable share price.
  • Asset Allocation Funds invest in a mix of stocks, bonds, alternatives and money market securities.
  • Alternative Funds do not invest in conventional securities such as stocks, bonds and cash. Rather, they invest in private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts.
  • Alternative strategies on traditional asset classes include long and short equities as investment strategies. This involves buying long equities expecting to increase in value and selling short equities expected to decrease.

Using Investment Management Products

There are a variety of investment products you can use to build a diversified portfolio and build wealth over time. Each one offers unique benefits that when used together, can provide you with a well-designed and diversified portfolio. Actively-managed mutual funds, passively-managed index funds, exchanged traded funds and closed-end funds are examples of vehicles that allow you to access professional money management and diversify risk. These three product options (described below) afford varying levels of management expertise, costs, and buy and sell trading benefits.

Mutual Funds

Mutual funds are the most common way people invest for the future with more than $20 trillion in investment assets. They are so popular because they are a simple, convenient way to invest in stocks, bonds, money markets, commodities and other securities. Through mutual funds, almost anyone can invest in the financial markets as a means to meet financial goals. Nearly half of all U.S. households invest in mutual funds.

These professionally managed investment products use money from investors to create a diversified pool of securities to achieve a specific investment objective. Investors purchase shares, which represent ownership in the mutual fund. The price of the fund fluctuates based on the gain or loss of the securities that make up the fund. Investors in a mutual fund are entitled to a pro-rata share of the proceeds, or the losses.

Exchange Traded Funds

An exchange traded fund is a type of security that is similar to an index mutual fund, because it tracks an index, commodity or a grouping of assets. But unlike a mutual fund, it can be traded like a stock on an exchange, with prices changing as shares are bought and sold.

With an ETF, you get the diversification of a mutual fund as well as the ability to sell short, buy on margin and purchase as little as one share. As a general rule, expense ratios for ETF’s are lower than the average mutual fund. You have to pay a commission to purchase an ETF through a broker.

One of the best known ETFs is called the Spider (SPDR), which tracks the S&P 500 Index and trades under the symbol SPY.

Closed-End Funds

Closed-end funds sell a fixed number of shares to investors during an initial public offering (IPO). This differs from open-end mutual funds which continually offer shares to investors. Since the issuance of new shares is closed to investors after the IPO, trading occurs on an exchange like the NASDAQ or NYSE, and investors can buy and sell shares of a fund as they would stocks. As a result, the demand for a particular closed-end fund may be greater or less than the actual value of the securities it owns, causing it to trade at a premium or discount. Closed-end funds are actively managed and generally designed to provide a steady stream of income that pays out monthly or quarterly. Because of their unique closed-end structure and ability to use leverage, which also increases a fund’s risk or volatility, many closed-end funds offer shareholders the potential for higher distributions than traditional income investments.

Asset Classes and Objectives

Mutual Funds Types of Mutual Funds

Growth Funds
Invest In Stocks of companies with high growth rates.
Suitable For Investors who can assume more risk and price movement to achieve growth.
Value Funds
Invest In Stocks of companies that appear to be undervalued.
Suitable For Investors who want long-term capital appreciation, dividend income and less price fluctuation.
Blend Funds
Invest In Growth stocks and value stocks.
Suitable For Investors who want to build wealth over time, when either of these types of stocks are in favor.
International Funds
Invest In Stocks of companies worldwide. These funds may have a growth, value or blend style.
Suitable For Investors who want capital appreciation accross a variety of economies. Currency and political risks should be considered.
Specialty/Sector Funds
Invest In Stock of companies in a specific industry or sector of the economy, such as health care, technology, leisure, utilities or precious metals.
Suitable For Investors who want to allocate a portion of their portfolio to a particular industry.
Taxable Bond Funds
Invest In U.S. government and government agency bonds, mortgage-backed and asset-backed bonds or bonds issued by corporations.
Suitable For Investors who want current income and can assume some principal risk. When interest rates rise, bond prices decline. If rates fall, bond prices rise.
Tax-Free Bond Funds
Invest In Bonds issued by state and local governments or agencies to raise capital for public works and improvements.
Suitable For Investors who want dividends free from federal taxes and, in some cases, state and local taxes. When interest rates rise, bond prices decline. If rates fall, bond prices rise.
 
Invest In A mix of stocks, bonds, alternatives and money market securities.
Suitable For Investors who want to build wealth through a single diversified portfolio.
 
Invest In High quality, short-term U.S. government and corporate debt securities. Tax-free money market funds are exempt from federal taxes and, in some cases, state local taxes.
Suitable For Conservative investors who want stability of principal, some current income and immediate liquidity.