| Mutual funds are one of the financial world's most | | | | a "load." |
| popular investment vehicles, and for good reason. | | | | Essentially, you are paying them to have the |
| For a relatively small investment, these funds give | | | | heartburn and ulcers associated with watching the |
| individual investors the ability to buy a diverse | | | | stock market eight hours a day, 52 weeks a |
| portfolio of stocks and / or other financial | | | | year, so that you don't have to. Whether or not |
| instruments - all in one transaction. | | | | the fund managers earn their keep depends on |
| If you have just two or more mutual funds, | | | | how skillful they are, and how the fund's fees are |
| chances are that you're more than adequately | | | | structured. |
| diversified. This means that you don't have to | | | | Load mutual funds charge either front-end loads |
| worry about one bad apple (i.e. Enron) destroying | | | | or back-end loads. Front-end loads charge you a |
| your entire investment account. | | | | percentage of your initial investment. |
| How Mutual Funds Work | | | | For example, if you invest $10,000 each into a |
| So how do these funds work? Each fund is | | | | pair of front-end load funds with loads of 3 |
| actively managed by a mutual funds professional. | | | | percent and 5 percent, you will only be investing |
| This is someone who has several years of | | | | $9,700 and $9,500, respectively. How long will it |
| experience analyzing and trading stocks or other | | | | take your funds to make up the $800 you've lost |
| securities, probably has an advanced degree, and | | | | right off the bat? |
| has worked his or her way up the ladder to what | | | | Instead of charging you up front, back-end load |
| is essentially the top of the money management | | | | funds don't charge you a load until you withdraw |
| profession. | | | | your money. |
| The fund manager chooses the securities that the | | | | These funds are usually a better deal, because |
| mutual fund owns. These funds can be composed | | | | the size of the loads usually decreases the longer |
| of stocks, bonds, and / or other financial | | | | you leave your money in the fund. |
| instruments. | | | | For example, a back-end load fund might have a |
| The types and balance of securities (i.e. 60 | | | | load of 7 percent if you withdraw your money |
| percent stocks, 35 percent bonds, 5 percent cash | | | | the first year, with the load going down by 1 |
| / money market), and the investment objectives | | | | percentage point each year, and reaching 0 |
| and strategies (i.e. aggressive growth or equity | | | | percent by the eighth year. |
| income) are listed in the mutual fund's prospectus. | | | | Mutual Funds - Just Say No To Your Broker; Buy |
| This way investors know what they are getting | | | | Direct Instead |
| into each time they buy new mutual funds. | | | | Typically, full-service brokers with offices on Main |
| Mutual funds are split into shares, just like stocks. | | | | Street only sell front-end load funds. This is |
| For example, a fund may own 5,000 shares of | | | | because they receive an up-front commission on |
| Microsoft (MSFT); 10,000 shares of General | | | | the sale of these products. |
| Motors (GM); 20,000 shares of Alcoa (AA), etc., | | | | Mutual funds are designed for average investors - |
| and be split into 100 million shares itself. | | | | you don't need a broker to recommend these |
| If the net asset value (NAV) of the shares is $1 | | | | funds for you, and you don't need to pay the |
| billion, then each share of the fund would be | | | | extra sales charges. |
| worth $10. The fund manager buys and sells | | | | There are hundreds of good, no-load funds that |
| shares of stock that the fund owns - you, in turn, | | | | charge only a small annual management fee |
| can buy or sell your shares of the fund, but only | | | | (which load mutual funds charge in addition to their |
| at the end of each trading day. | | | | loads) available directly from fund companies. |
| No Load Mutual Funds vs. Load Mutual Funds | | | | Most funds have a minimum investment of |
| So what's the catch? Well, mutual fund managers | | | | $2,500, but this can usually be waved if you |
| have to be compensated for their services, so | | | | commit to regular monthly investments of as little |
| they charge you a fee which is sometimes called | | | | as $50. |