1. 12 things you need to know about... What is a Mutual Fund? 2. A mutual fund is a pooling of investments to meet a common objective. There are mutual funds that cover almost every type investment you can think of. There are money market mutual funds, short-term bond funds, long-term bond funds, high yield or junk bond funds, mortgage funds, foreign income funds, stock funds based upon different styles, more later precious metal funds, real estate funds, you get the picture. Advantages of a Mutual Fund Diversification A mutual fund may hold 30 to 500 different investments under one name. Low minimum investment you can invest with as little as $50 a month or an initial investment of $500 to $1,000. Professional management you can let an expert choose what to buy, when to buy it, how much to buy and when to sell it. Liquidity mutual funds are actively traded and allow you to get in and out when you need to with only minor restrictions.
Variety there are over 20,000 mutual funds covering just about any type investment you are interested in. 3. Where Can You Get Mutual Funds? You can buy them direct from the sponsoring mutual fund company. You can buy them through a mutual fund custodian like Charles Schwab, TD Ameritrade or Fidelity. You can get them through full service brokers like UBS or Merrill Lynch or discount brokers like Scottrade or E- Trade. Banks and Credit Unions now offer mutual funds through brokers, subsidiaries or partnership with a registered representative. You can buy them through independent advisors or from local financial planners. 4. What are the Fees? Front End Load Some funds charge you to buy them up front for a fee of 4 to 5.75%. These are commonly referred to as A class shares. Back End Load or deferred sales charges are charges when you leave a fund. They typically start at a fee of 5% the first year and are reduced by 1% per year. These are referred to as B class shares. 12(b)(1) fees are a continuing fee charged by the fund, and are usually called C class shares.
Redemption Fee some shares do not charge you to buy or sell but impose a 1% fee on all withdrawals regardless of when you take money out. Short Term Redemption Fee to stop people from day trading mutual funds some companies will charge a fee if you redeem shares within 90-300 days. This is very common with real estate funds, international funds and small cap stock funds. No Load Funds do not charge you to buy or sell shares. 5. What about Expenses? All funds have some sort of expense. There are management fees that cover the cost of professional management. There may be 12 b-1 fees to cover additional costs to market the fund. These are very common when commissions are being paid. The fund itself has operating expenses to do business. Expenses can vary dramatically. 6. What is the Objective? All mutual funds have an investment objective. The objective will be stated in the prospectus. The prospectus is the written facts about a mutual fund. The objective is the goal being sought by the fund manager such as current income with preservation of principal or stocks of large companies believed to be undervalued or stocks consistent
with the S&P 500. The important thing is that the fund objective matches your objective. Often times funds will deviate from their stated objective so it is important to keep an eye on them. Several rating companies place their own spin on the objective of a fund based on what it actually owns in the portfolio not what the fund company says it is. 7. What is Style and why is it Important? Style tells you what types of investments the mutual fund will concentrate in its holding. With domestic stock funds it tells you whether the mutual fund is buying large, mid-size or small company stocks. It further classifies them based on whether they are buying stock for value or for growth. Value and growth are based upon the price to earnings ratio and the price of the stock to its book value: P/E and P/B. Stocks with low prices relative to their profits or assets are called value, Stocks with high growth rates and higher prices are called growth. Some funds are a blend they own both value and growth. With income funds it tells you whether the portfolio is short term medium term or long term. It also will tell you the overall quality of the individual investments such as high quality, medium quality or low quality based upon their credit worthiness
8. Performance Performance is the key to finding and keeping good mutual funds. You should measure performance against like funds. You can get performance numbers from a variety of places. You can get them from independent sources like Morningstar, Value Line, Barron s, The Wall Street Journal, Money, and Kiplinger s Personal Finance. Every internet home page has a link to a financial center. See yahoo.com finance or MSN.com money. You can get data from the companies directly or from their website. All brokerage houses have research on funds and allow access to research thru their websites. See Schwab.com or TDAmeritrade.com or Fidelity.com for more information. 9. Risk All mutual funds have some risk. We need to evaluate risk, since risk can be very bad when you re withdrawing, say from an IRA. Standard Deviation is a normal measure of risk. The higher the Standard Deviation the more volatile the fund. It measures how much the fund can move both positively and negatively. Remember risk can be good when stocks are going up!
10. What is an Index Fund An Index Fund concentrates its holdings to match a particular benchmark or style. Index Funds buy all the stocks of a particular index, as a result they are not actively managed. The cost associated with Index Funds is generally low. There are Index Funds based on style such as Large Value or Large Growth or based on a benchmark such as the Russell 2000 or the Wilshire 5000 or on EAFE for international. The most popular Index for mutual funds is the S&P 500. It is generally 500 of the largest stocks in the United States. Since some stocks are Value Stocks and some are Growth Stocks but they are all large companies it is a Large Blend by style. Index funds are used to model the market. 11. Family of Funds Many mutual funds are part of a family of funds. Families have a variety of funds to meet all of your objectives within the same family like Fidelity (fidelity.com) or (vanguard.com). You can move from fund to fund without incurring any additional charges. You may be eligible for breakpoints on commissions by combining all your purchases to one family.
12. Where can I get Research Information? Morningstar.com Valueline.com Schwab.com Fidelity.com TDAmeritrade.com Your local library Periodicals The Wall Street Journal Barron s Money Magazine Kiplinger s Personal Finance Worth Magazine