What is a Mutual Fund?

An investment company created under the Investment Company Act of 1940 that pools the resources of investors to buy a variety of securities, depending on the fund's stated objectives and management style. The investments typically are chosen by a professional manager. Mutual funds offer diversification and convenience even to small investors, and the thousands of mutual funds available today cater to every conceivable investment need and taste. [Top]

What types of Mutual Funds are there?

There are wide variety of mutual funds on the market. These are just some of the categories listed by the fund-trackers at Morningstar.

STOCK FUNDS

Agressive Growth Funds: These funds seeks to maximize growth in capital with little priority given to current income, such as dividends. Both the porfolio itself, such as smaller, new companies, and the investment techniques, may entail extra risk. They are typically considered one of the highest-risk categories of funds.

Growth Funds: Invest in the common stock of well-established companies. These funds seek capital growth with just a small emphasis on current income.
Growth and Income Funds: These funds invest in companies that can increase in value but also have an established record of paying dividends. Equal emphasis on current income and future growth. Considered moderate-risk funds.

Global Funds: Invest mostly in the stocks of companies that are traded globally, including the United States. Both global and international funds seek capital growth in the value of their investments.

International Funds: Invests in the stocks of companies that are strictly located overseas.

Income-Equity Funds: Invests in companies with high dividend-paying stocks. The primary of these funds is to generate a high level of income

BOND FUNDS

Balanced Funds: A mixture of stocks and bonds, these funds look to preserve the value of principal, but also earn some current income and achieve some long-term growth.

Global Bond Funds: Invests in debt securities in companies and countries worldwide, including the United States.
Corporate Bond Funds: Invests primarily in the the debt of American corporations and seeks a high level of income.

Municipal Bond Funds: Invests in bonds issued by state and municipal governments. This income, unlike regular bond interest income, is excempt from federal taxation.

U.S. Government Income Funds: Invests in a number of government securites including U.S. Treasury bonds and seeks current income through interest payments.

MONEY MARKET FUNDS

Taxable Money Market Funds: Invests in short-term, high quality securites such as certificates of deposit and Treasury bills. It seeks to maintain a stable net asset value, usually $1 a share.

Tax-Exempt Money Market Funds: Invests in securites that are exempt from federal taxes and in special cases state taxes for residents of that state. [Top]

When I put my money in a mutual fund, where is it invested?

When you invest in a mutual fund, your money can be invested in a variety of ways. Some funds invest only in stocks, others only in bonds. Many funds buy both. Some buy securities issued by companies involved in a certain industry, or search out values in stocks and bonds offered overseas. [Top]

What is net asset value?

The net asset value, or NAV, is the price at which you buy or sell shares of a mutual fund. To determine the NAV, a mutual fund computes the value of its assets daily by adding up the market value of all the securities it owns, subtracting all liabilities, and then dividing the balance by the number of shares the fund has outstanding. The NAV is the figure you look at in the newspaper to see how much your mutual fund investment rose or fell the previous day. [Top]

Are mutual funds insured by the FDIC?

No, the FDIC does not insure mutual funds even if they are purchased through a bank. The Federal Deposit Insurance Corp. (FDIC) insures deposits of $100,000 or less in banks, credit unions and savings and loans. This sometimes surprises people who purchase mutual funds through their banks. [Top]

What kinds of fees are associated with mutual funds?

Here is the overview of fees according to "The Wall Street Journal Guide to Understanding Money & Investing":

Management fees are annual charges to administer the fund. All funds charge this fee, though the amount varies from a fraction of 1% to more than 2%. Distribution fees (known as 12b-1 fees) cover marketing and advertising expenses, and sometimes are used to pay bonuses to employees. About half of all funds charge them. Redemption fees are sometimes assessed when shares are sold to discourage frequent in-and-out trading. In contrast, a deferred sales load, a kind of exit fee, often applies only during a specific period -- say the first five years -- and then disappears. Reinvestment fees are similar to loads; they're charged when distributions are reinvested in a fund. Exchange fees can apply when money is shifted from one fund to another within the same mutual fund company. [Top]

How can I research a mutual fund?

It is important to have complete and accurate information when deciding on which mutual funds to invest in. A good place to start is the Morningstar link located under the Investment Profiles section, which can be found after you log into your individual account. Here you will be able to access information regarding your available fund choices and get a performance evaluation. In addition, all mutual funds must publish a prospectus and produce annual reports that discuss how the fund has been faring and provide details about fund holdings. [Top]