When you purchase shares in a mutual fund, your dollars are invested in a large number of companies all at once, and your investment risk is spread out over many stocks of many companies, not just one. The ups and downs in the value of your investment with a mutual fund may not be as volatile as with an individual stock because you are more diversified.
Mutual funds make it easy for you to invest in stocks and bonds. The two main advantages of investing your money in mutual funds are 1) you receive professional money management and 2) you are able to truly diversify your holdings with a small sum of money.
Each mutual fund has one or more fund managers who are skilled in principles of money management. They have access to a huge database of research -- so basically you’re leaving the driving to them.
Each fund also has a particular objective. That objective is defined in the fund’s prospectus, which describes a mutual fund and offers its shares for sale. The prospectus provides information such as investment objectives, charges, expenses and operating policies. A prospectus must be provided to an investor at the time of the sale. The investor should read it carefully before sending money or investing.
The objective could be for example long-term growth, current income, or a combination of income and growth. For example, the objective of XYZ fund is long-term growth. To accomplish the fund’s objective, the fund manager invests the money received from its shareholders (that’s you) by purchasing shares of many individual companies (or leaving a small portion in cash.)
Some stock mutual funds can own shares of stock from a few hundred companies, thereby limiting its holdings in any one company to no more than 5-6% of all the assets in the mutual fund. This is true diversification and your risk is less than if you invested in just one or two individual stocks.
Let’s look at the different choices available.
Features Of Mutual Funds And Risk
|
Asset
|
Type of Fund
|
Expected Return
|
Risk
|
|
Other
|
Specialty Fund
|
Higher
|
Most Risk
|
|
International Stocks & Bonds
|
International Fund
|
|
Global Stocks and Bonds
|
Global Fund
|
|
Stocks
|
Aggressive Growth Fund
|
|
Stocks
|
Growth Fund
|
|
Stocks
|
Index Fund
|
|
Mostly Stocks
|
Growth and Income Fund
|
|
Mostly Stocks
|
Equity-Income Fund
|
|
Stocks and Bonds
|
Asset Allocation Fund
|
|
Stocks and Bonds
|
Balanced Fund
|
|
Bonds
|
Corporate Bond Fund
|
|
Bonds
|
Mortgage-Backed Bond Fund
|
|
Bonds
|
Single State Tax Exempt Bond Fund
|
|
Bonds
|
Municipal Bond Fund
|
|
Bonds
|
U.S. Government Bond Fund
|
|
Cash
|
Money Market Fund
|
Lower
|
Least Risk
|
With all mutual funds, the value of your investment could decline so you could lose money. Funds are subject to the general risks associated with the markets and securities in which they invest, including the risk that the value of a portfolio may be impacted gradually or sharply by general conditions of the market, changes in interest rates or the performance of an individual company, industry or economy. You should consider a fund's investment objectives, risk, charges and fees carefully before investing. Investment return and principal value may fluctuate so that shares, when redeemed, may be worth more or less than their original cost.
