Choose a Mutual Fund

There are two principle methods of managing money in mutual funds, exchange-traded and closed-end funds – they can be either actively or passively managed.

Actively Managed

Portfolio management decisions of actively-managed funds are made by professional investment managers and research teams whose goal is to deliver higher returns than their benchmarks. The term refers to the ability of the fund to make timely, active decisions to buy and sell securities depending upon market conditions and opportunities. Actively-managed funds are not required to hold specific stocks or bonds and have the ability to get out of a holding or market sector when risks get too large. They differ greatly from passively-managed funds (defined below), such as index funds, which match or track the components of a market index. Active managers combine research, market forecasting, and their experience to make decisions based on the goals set forth in the fund’s prospectus, which may range from narrow to wide. They offer the potential to outperform indexes over time, but also feature the possibility of underperforming them. Actively managed funds also have higher management fees than passive funds in order to pay for the professional teams that manage them. The following chart lists the differentiating features of actively-managed funds.

• Achieve specific outcome, absolute return or certain level of income
• Broad diversification
• Experienced management
• Ability to react to market conditions

Passively Managed

Stocks in passively managed funds (i.e. traditional mutual funds) are not actively managed by a portfolio manager, but instead replicate an index like the S&P 500 and pursue index-like returns. This is the opposite of an actively managed fund (defined above). While actively-managed funds strive to outperform indexes over time, passively managed funds track the components of a market index to deliver the performance of the underlying index. However, the returns do not usually equal their benchmarks because trading costs are involved. Passively-managed funds tend to have low tracking error, which is a measure of how closely a portfolio replicates an index.

Passively managed funds also have lower management fees than active funds since they are not paying for professional teams to actively manage them. Passively managed portfolios often do not own every security in the benchmarks so portfolio managers try to reduce trading costs by holding only benchmark securities that track the benchmark’s overall performance.

The chart below shows the differentiating features of passively managed funds.

• Capture market return
• Low tracking error
• Reduced turnover
• Low-cost

Smart beta strategies attempt to deliver a better risk and return trade-off than conventional market cap weighted indices by using alternative weighting schemes based on measures such as volatility or dividends. Rather than weighting companies solely according to their size, smart beta uses fundamental analysis principles to determine which companies should be given a larger piece of the index pie. Smart beta strategies are popular for investors seeking factor diversification, but these strategies are not all alike. Carefully assess the indexes, biases and specific single or multi-factors each uses.

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 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.

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.