The Basics of Mutual Funds

 

A mutual fund takes the money of many investors and pools it together to purchase investment securities, such as stocks and bonds.

When you invest in a mutual fund, you own a small piece of each individual security. One attractive quality of a mutual fund is simply that you have not put all of your eggs in one basket.

Each mutual fund has a fund manager whose job is to buy securities based on the fund's investment objectives.

Types of Mutual Funds

Equities

Equities are funds where the investment made is mostly in stocks. Often, these funds stress growth as their primary objective. With equities, the fund manager chooses stocks for their potential long-term growth.

Of course, “equities” are a broad category, within which are many specific types of stock mutual funds. For example:

Small Cap Stock Funds focus on young, relatively small companies that are expected to grow faster than average.

Large Cap Stock Funds typically invest in larger, more stable companies.

Bonds

Bond funds are comprised of debt instruments that both governments and corporations issue to raise capital.

Bond funds typically seek current income and are generally classified by the type of issuer in its portfolio. For example:

A government bond fund would focus on U.S. Treasuries and debt issued by federal agencies.

Or a bond could be classified by the term of the bonds it holds (e.g., a short-term bond fund might hold bonds due in 1-2 years).

Or the bond’s classification could be a combination (i.e., an intermediate-term corporate bond fund).

The performance of bond funds is affected by the same inflation, interest-rate, and credit risks that influence their underlying bonds. As interest rates rise, bond prices typically go lower, which can adversely affect the fund’s performance.

Want to learn more? Call the retirement professionals at the MHV Investment & Retirement Center at 845-336-4444, ext 3166 or 3126, or email us at april.stoddard@cunamutual.com.

Money Market Funds

Money market funds are designed to preserve capital.

A money market fund holds very short-term debt. It is often used as a place to invest your money temporarily until you decide how to better invest it somewhere else.

A money market fund protects the value of your initial investment by keeping its share price at $1. However, there is no guarantee it can always do so. It is possible to lose money in a money market fund.

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Index Funds

An index fund attempts to match the performance of an index, such as the Standard & Poor's 500 stock index. It does this by holding the same securities used by the index. It is not possible to invest directly in any index.

Sector Funds

A sector fund generally focuses on a specific industry, such as biotechnology or real estate.

Combinations

Some mutual funds have a combination of objectives.

For example, a balanced fund often invests in stocks and bonds, hoping to achieve both growth and some income.

An asset allocation, lifestyle, or lifecycle fund typically invests in all three of the major asset classes; the amount of each class depends on the fund's asset allocation strategy.

A fund using basic asset allocation devotes a set percentage of its assets to each type of investment. An example could be 50 percent to stocks, 30 percent to bonds, and 20 percent to cash. This allocation is generally held steady.

A lifestyle fund will determine its allocations based on your tolerance for risk; a conservative fund would likely focus on stability and/or income, while an aggressive fund typically pursues growth/capital appreciation.

A lifecycle fund tends to shift the allocation of its assets over time, often becoming more conservative as you get closer to your goal.

 

The Advantages of Mutual Funds

In addition to providing a diversified portfolio, mutual funds have other advantages:

Experienced money management: When you select an actively managed mutual fund, part of what you pay for is the fund manager's experience and expertise. This professional money manager looks at hundreds of securities and decides what to buy and when to sell.

Liquidity: By redeeming your shares, you can easily convert your mutual fund investment into cash.

The ability to make small investments cost-effectively: By investing through your workplace retirement plan, you're able to start your account with a very small investment, and add to it regularly. Making regular investments through your workplace savings plan means that you won't generally owe a transaction charge on each purchase (though workplace plans may include overall plan fees, and some funds may impose a charge if you sell your shares before a certain time period has passed).

No mutual fund is a guaranteed investment. The price of all mutual fund shares may fluctuate daily. When you sell, you receive the current value of your shares at the time of the sale. And that may be more or less than you paid.

Note: Before investing in any fund, carefully consider its objectives, risks, fees and expenses. These will be detailed in the prospectus provided by the fund. Read your prospectus carefully. All investing involves risk. This can mean a loss of part of your principal investment, and there are no guarantees that any investing strategy will be successful.

 

Evaluating a Mutual Fund


Performance and Returns

A fund's prospectus includes figures on historical performance and compares them to an appropriate benchmark index. Consider how a fund has performed in both bull and bear markets. A fund's prospectus must include its best and worst quarterly performance during the past 10 years.

Risks

A mutual fund involves the same types of risks as the securities it invests in.

Be sure you understand the various types of risk a fund may face. In addition to the risks faced by all mutual funds, such as market risk, a fund may involve risks that are specific to the underlying investments.

For example, a global stock fund may face currency risk (potential loss from changing currency values); a bond fund faces default risk (the possibility that bond issuers might default on a loan) and interest rate risk (rising interest rates could affect the fund's share price). While diversification lowers risk, it cannot eliminate all risk.

Fees and expenses

Investing costs can have a substantial impact on your net returns, especially over a long time period.

Find out how much you're paying to invest in a particular fund.

A fund's expense ratio shows its annual costs as a percentage of its assets; some types of funds typically have higher expense ratios than others

Potential fees and expenses of your workplace savings plan's funds will likely include operating expenses that are paid from fund assets, such as fees paid to the fund's manager, 12-b1 marketing fees, and any transaction charges the fund pays when it trades individual securities.


Are you ready to consider investing in a mutual fund?

Call the investment professionals at the MHV Investment & Retirement Center at 845-336-4444, ext. 3166 or 3126, or email us at april.stoddard@cunamutual.com.

 

FR-1543086.1-0716-0818

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