Mutual funds are designed to make investing easy, but the sheer number of funds – more than 10,000 are available – can leave even experienced investors wondering which ones are most appropriate. Selecting the funds that best fit with your financial goals and needs can be a daunting task. By arming yourself with a little background knowledge, you may be able to better find your way through the forest of mutual fund names and descriptions. Here’s a closer look at some of the more common mutual funds and their accompanying investment strategies. Different funds for differing investment needs Mutual funds are established by investment companies to pool the money of many investors and invest in a variety of different asset classes, such as stocks, bonds and money market instruments. These assets are professionally managed by a fund manager on behalf of the shareholders. Each investor is entitled to any profits when the securities are sold but is also subject to any losses in value. In general terms, there are three basic types of mutual funds: equity funds, which invest primarily in shares of stock issued by U.S. or foreign companies; fixed-income funds, which invest in government or corporate securities offering fixed rates of return; and balanced funds, which invest in a combination of both stocks and bonds. Other common mutual funds include: o Growth funds focus on the goal of capital appreciation by investing in companies that are positioned for strong earnings growth. The companies in growth funds typically pay little in stock dividends, choosing instead to reinvest earnings to expand or for research and development. o Aggressive growth funds and small-cap funds typically invest in small, growing companies that have the potential to produce significant earnings gains. Because the companies are often start-ups or from new industries, such mutual funds generally carry more investment risk and price volatility. o Growth and income funds focus on growing your invested principal but still generate dividend income by investing in growth-oriented companies that pay dividends. Growth and income funds are often less risky and less volatile than pure growth funds. o Index funds invest in securities that make up an established market index. For example, an index fund based on the Standard and Poor’s 500 (S&P 500) would invest in all or a representative sampling of the stocks that make up that index. Because securities in an index fund’s portfolio rarely change, management costs are generally low. o Value funds buy undervalued or overlooked stocks. Such funds are based on the strategy that, over time, the fund’s holdings will gain momentum and provide superior returns. o Sector funds concentrate on companies in a particular industry such as energy or technology, or on specific commodities such as oil, gold or natural gas. Sector funds are less diversified than the broader market and are often more volatile. o Global funds and international funds can add foreign stocks and bonds to your investment portfolio. Global funds generally hold a mix of U.S. and foreign stocks, while international funds focus exclusively on overseas holdings. Know the costs Different funds can vary substantially in their sales charges and management fees, often depending on the investment strategy on which the fund is based. For example, selecting investments for an index fund, which uses a benchmark such as the S&P 500, requires little research or expertise. So you could probably expect an index fund’s expense ratio to be lower than that of an international stock fund, for which the manager must investigate not only foreign companies but also the political and economic climates in which they operate. Most mutual fund companies make their money by charging investors certain fees for services: o Sales charges or “loads” are generally charged when you buy or sell shares. “No-load” funds do not impose a sales charge but may charge higher management fees and ongoing expenses to make up the difference. o Operating expenses are deducted directly from a fund’s earnings. These include fees paid to the investment manager and expenses involved in administering the fund. Typically, the total of these costs is expressed as an annual percentage of a fund’s net assets, called the expense ratio. You’ll find this ratio listed in the fund’s prospectus. To get a better idea of how mutual fund costs might affect your portfolio, visit the online mutual fund cost calculator at the Securities and Exchange Commission Web site, www.sec.gov/investor/tools/mfcc/mfcc-int.htm. Don’t get lost in the name game Deciding which mutual funds are most appropriate within your own personal economy can be a complex task. To simplify the decision-making process and better understand how different mutual funds might fit with your overall investment plan, consult a professional financial advisor. This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or financial advisor. The views expressed may not be suitable for every situation. Investments that focus on a narrow sector may have greater volatility than those that invest more broadly. International investing involves some risks not present with U.S. investments, such as currency fluctuations and other economic and political factors. Stocks of small or mid-sized companies may be subject to abrupt or erratic price movements more so than stocks of larger companies. Investors may be subject to state income taxes and federal alternative minimum tax.
