| Since the 1920s, mutual funds have helped | | | | two-thirds of their portfolios in U.S. government |
| Americans achieve their financial goals. Today | | | | securities and have no stated average maturity. |
| they are one of the most popular investments. | | | | Bonds issued by Uncle Sam are backed by the full |
| According to the Mutual Fund Education Alliance, | | | | faith and credit of the U.S. government. |
| more than 80 million investors in the United States | | | | High-yield bond funds-Seek a high level of current |
| own mutual funds. | | | | income by investing at least two-thirds of their |
| But if you're like most investors, you may have | | | | portfolios in lower-rated corporate bonds (Baa or |
| questions about different fund types, class shares, | | | | lower by Moody's and BBB or lower by Standard |
| expenses and how to select the funds most | | | | and Poor's rating services). |
| suitable to your investment needs. You'll find | | | | Mortgage-backed funds-Invest at least two-thirds |
| answers to these questions in this five-part series | | | | of their portfolios in pooled mortgage-backed |
| of articles about the world of mutual funds. | | | | securities. |
| What is a mutual fund? | | | | National municipal bond funds-Invest predominantly |
| Mutual funds are often referred to as open-end | | | | in municipal bonds. The funds' bonds are usually |
| funds. This means there is no limit to the number | | | | exempt from federal income tax but may be |
| of shares investors can buy and sell. You might | | | | taxed under state and local laws. |
| also hear about closed-end funds, which are | | | | Other world bond funds-Invest at least two-thirds |
| investment companies that sell a fixed number of | | | | of their portfolios in a combination of foreign |
| shares traded only on the stock market. | | | | government and corporate debt. Some funds in |
| The money you invest in a mutual fund is pooled | | | | this category invest primarily in debt securities of |
| along with that of other shareholders with similar | | | | emerging markets. |
| financial goals. Most mutual funds are part of a | | | | State municipal bond funds-Invest primarily in |
| larger investment company or family of funds. | | | | municipal bonds of a single state. The funds' bonds |
| Each fund is managed by a team of professional | | | | are exempt from federal and state income taxes |
| money managers who monitor the fund's | | | | for residents of that state. |
| performance and, based on thorough research, | | | | Strategic income funds-Invest in a combination of |
| choose investments they believe will help the fund | | | | domestic fixed-income securities to provide high |
| reach the investment objectives stated in the | | | | current income. |
| prospectus (for example, current income or | | | | Other mutual fund investments |
| capital growth). | | | | In addition to the stock and bond funds described |
| Because a mutual fund is essentially a collection of | | | | in previous articles, mutual fund investing offers |
| different investments, investors use them to | | | | other choices that might be appropriate to your |
| reduce investment risk without having to | | | | circumstances and goals. These choices include: |
| purchase individual stocks and/or bonds. | | | | Balanced funds |
| Diversification, while recommended, does not | | | | These funds, also known as hybrid funds, are a |
| guarantee a profit or ensure against a market | | | | combination of stock and bond funds. Balanced |
| loss. | | | | funds seek high total return by investing in a mix |
| Another advantage of investing in mutual funds is | | | | of equities, fixed-income securities and money |
| liquidity. Generally, you can redeem or sell your | | | | market instruments. Unlike flexible portfolio funds, |
| shares any day the stock market is open. | | | | these funds are required to strictly maintain a |
| However, you should keep in mind that | | | | precise weighting in asset classes. |
| investment values will fluctuate and there is no | | | | Money market funds |
| assurance that the objective of any fund will be | | | | Money market funds typically invest in short-term |
| achieved. Mutual fund shares are redeemable at | | | | government and company loans, which, while |
| the current net asset value, which could be more | | | | lower-yielding, are generally less risky than many |
| or less than their original cost. Fund annual | | | | other types of funds. Money market funds can |
| operating expenses apply as well as plan | | | | be appropriate for investors who:o Need access |
| administration charges. These are described in the | | | | to their money in the near futureo Are looking for |
| prospectus. | | | | a current short-term rate of interesto Are very |
| Stock mutual funds | | | | conservative in their investment approach |
| If you're considering investing in a mutual fund, | | | | An investment in a money market fund is not |
| you'll need to know about the types of funds that | | | | insured or guaranteed by the Federal Deposit |
| are available. You can select a stock or equity | | | | Insurance Corporation (FDIC) or any other |
| fund, bond fund, balanced fund (a combination of | | | | government agency. Therefore, while the fund |
| stock and bond funds), lifestyle fund or money | | | | seeks to preserve the value of your investment |
| market fund. In Part Two of this series, we'll take | | | | at $1 per share, it is possible to lose money while |
| a look at stock funds. | | | | investing in the fund. |
| Generally, stock or equity mutual funds are best | | | | Classification of class shares |
| suited for investors who:o Seek capital growth | | | | When you invest in a mutual fund, you purchase a |
| over extended periods of timeo Are willing to | | | | share of that fund. There are different share |
| tolerate share-price volatilityo Have an investment | | | | classes in which you can invest, the most |
| horizon of five or more years | | | | common of which are class A, B and C shares. |
| Stock funds can have different investment | | | | Share classes vary mainly in the type of sales |
| objectives and target companies in various | | | | charge and expenses you incur. The best share |
| industry sectors and market capitalization (the | | | | class for you depends on a number of factors, |
| gauge of a company's size or value). Funds invest | | | | including the amount you plan to invest and how |
| in companies within one of the three market | | | | long you plan to hold the shares. |
| capitalization categories: large-cap funds (more | | | | Share typeso Class A shares have a front-end |
| than $11.7 billion), mid-cap funds ($2.9 billion to | | | | sales charge you pay at the time of purchase and |
| $11.7 billion) and small-cap funds (up to $2.9 billion). | | | | is deducted from your investment amount.o Class |
| The following are the different types of stock | | | | B shares typically do not have an up-front sales |
| funds, ranked in order of the highest to lowest | | | | charge. Instead, a class B share has a contingent |
| investment risk: | | | | deferred sales charge (CDSC) that declines each |
| Aggressive growth funds-Seek rapid growth of | | | | year until it eventually expires. Once their CDSC |
| capital, often through investment in smaller | | | | expires, Class B shares convert to Class A |
| companies and with investment techniques | | | | shares.o Class C shares do not have an initial sales |
| involving high-risk, short-selling, leveraging and | | | | charge. Rather, they also have a contingent |
| frequent trading. | | | | deferred sales charge-typically 1% if shares are |
| Growth funds-Seek capital appreciation by | | | | sold within the first year. They do not convert to |
| investing in equity securities of companies with | | | | Class A shares and have an ongoing, higher |
| earnings that are expected to grow at an | | | | management fee. |
| above-average rate. Current income, if considered | | | | Operating expenses |
| at all, is a secondary objective. | | | | All mutual funds have operating expenses that |
| Growth and income funds-Seek capital | | | | may include management fees, distribution fees |
| appreciation and current income equally by | | | | or 12b-1 fees and shareholder mailings, among |
| investing in equity securities that have | | | | other expenses. You do not pay for these |
| above-average yields and some potential for | | | | directly. Instead, they are deducted from the |
| appreciation. | | | | fund's net assets-or the overall return of the fund. |
| Income funds-Seek income rather than capital | | | | For more information on a fund's fees and |
| appreciation by investing primarily in equity | | | | expenses, refer to the fund prospectus. |
| securities of companies offering good dividends. | | | | A fund's total expense ratio is the combination of |
| International stock funds-Invest at least | | | | the different operating expenses, such as |
| two-thirds of their portfolios in equity securities of | | | | advisory fees, distribution fees and ongoing fees. |
| companies located outside the U.S. (global stocks). | | | | The fund's expense ratio is a means to compare |
| Domestic (U.S.) stocks may or may not be held. | | | | its cost to that of other funds and to learn about |
| Specialty funds-Seek capital appreciation by | | | | the fund's fees and expenses. |
| investing at least 65% of assets in equities of a | | | | Shareholder fees include any commissions paid to |
| single industry or sector, such as financial services, | | | | brokers when shares are bought or sold. These |
| healthcare, natural resources, precious metals, real | | | | commissions are often described as "front-end |
| estate or utilities. | | | | loads" (sales charges when you buy) or "back-end |
| Lifestyle Funds-Invest in other funds and are | | | | loads" (sales charges when you sell). No-load |
| optimized to reflect levels of risk and return | | | | funds, as the name implies, do not have front-end |
| suitable to specific times of an investor's life. | | | | or back-end sales charges, but generally do have |
| Bond funds | | | | operating expenses and shareholder fees. |
| As the name suggests, bond funds are mutual | | | | Taxes |
| funds investing in various types of bonds. Bond | | | | Each year, mutual funds outside of an employer |
| funds may be appropriate for investors who:o | | | | tax-qualified plan must distribute substantially all of |
| Value relatively steady income over growtho | | | | their income and capital gains to shareholders. As |
| Seek yields that are potentially higher than money | | | | a result, shareholders of a mutual fund generally |
| market rateso Want to diversify investmentso | | | | must pay income taxes on dividends and capital |
| Can accept modest fluctuations in the share price | | | | gains, if any. Each fund provides an IRS Form |
| Bond funds aren't the same as bonds. There's no | | | | 1099 to shareholders annually to summarize the |
| fixed yield nor contractual obligation to repay | | | | fund's dividends and capital distributions. Then, |
| investors their principal at a future date, as is the | | | | when a shareholder sells shares of a fund, the |
| case with bonds. Bond fund managers continually | | | | shareholder will realize either a taxable gain or a |
| trade their positions, so the risk-return | | | | loss. |
| characteristics of a bond fund investment is | | | | Determine your financial objectives |
| always changing, just as with other mutual fund | | | | Choosing the type of investment that is right for |
| investments. | | | | you depends on your financial goals. Are you |
| The main types of bond funds include: | | | | saving for college or your retirement? Do you |
| Corporate bond funds-Seek a high level of income | | | | need stable income or can you afford a |
| by investing two-thirds or more of their portfolios | | | | longer-term investment with greater historical risk, |
| in corporate bonds. | | | | but potentially higher returns? Before investing in a |
| Global bond funds-Invest in worldwide debt | | | | fund, carefully review the fund's investment style, |
| securities. Up to 25% of their portfolio's securities | | | | performance history and expense ratio, and |
| (not including cash) may be invested in companies | | | | consider your time horizon and level of risk |
| located in the United States. | | | | tolerance. |
| Government bond funds-Invest at least | | | | |