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