Mutual Funds |
Overview More information about mutual funds | Mutual funds pool the assets of its shareholders and invest them in many types of stocks, bonds and other securities. They help the small investor share the expense of professional management with other fund investors, as well as gain access to a diversified portfolio. Mutual funds were held by over 82 million individuals and 48 million households by the end of 1999. There are over 8,000 funds with more than $6.8 trillion dollars. Many people buy them for their competitive returns. Others because they are easy to buy and sell. Still others cite the diversity they offer which helps to spread risk. |
Buying and Redeeming Funds Buy through a mutual fund company or a stock broker. | You can buy mutual fund shares directly from the mutual fund company or from a stock broker. Either way buying and redeeming is relatively easy. To buy shares directly from a mutual fund, you send money to the fund. Redeeming shares works the same way. In all cases, the customer (you) executes all transactions with the mutual fund company. Many funds also allow you to redeem shares over the telephone. You can also set up an automatic investment plan to do your work for you. Under this plan, a fixed amount of money will be withdrawn monthly from your bank account and sent to the fund. Using this option requires that you first authorize it on your application form. Most mutual fund companies do allow this option. Many funds require initial investments over $1,000. However, many of them waive this requirement if you agree to an automatic investment plan that withdraws from your bank account until you have reached the required minimum. |
Fund Costs Fund costs are a major drag on your portfolio -- be sure to minimize these costs. | Mutual funds charge fees for the costs of running the fund. A fund's prospectus lists all the fees charged by the fund, though some are hidden. Sales charges are the fees for purchasing or redeeming shares of a mutual fund. By law, sales charges may not exceed 8.5 percent of the amount invested. Funds with sales charges are called load funds; funds with no sales charge are called no-load funds. They may be either front-loaded funds that charge a fee (1% or more) when you purchase the fund, or back-loaded funds that charge a fee when you sell. In trading stock for your fund, the manager incurs brokerage and related costs. These expenses are passed on to the investors. Actively traded funds experience higher expenses, which will reduce their returns. Many funds also charge 12b-1 fees and/or management fees to their investors on an annual basis to help cover distribution costs and commission and toll-free telephone lines. They may also charge exchange fees if you transfer money from one fund to another within the same fund family. Remember that all of these fees can add up and reduce the returns you receive from your investment. |
Fund Performance & Returns Total return includes:
| The total return of a mutual fund is derived from several sources. Mutual funds pay their holders dividends from the earnings of the stocks, bonds, etc. in the fund. Dividends from a mutual fund are your percentage of earnings from the company who distributed the stock to shareholders. You can receive dividends as cash or you can reinvest them into the fund. Many funds will automatically reinvest your dividends if you have given them authorization. Any dividends will be taxed as though they were ordinary income, unless they come from a return of capital, a tax-free municipal bond fund, or are part of a retirement account. Another source of potential income in mutual funds is capital gains. When a security in a fund is sold, any gain (or loss) on it must be distributed to shareholders. You can receive your capital gains as cash, or you can have them reinvested. The taxation rules that apply to dividends also apply to capital gains. Investors may also benefit from share price increases. This is the rise in value of a share of your fund. If the price of one share increases by one dollar, you have made a gain of one-dollar times the number of shares you own. This type of gain is called paper profit because you do not receive it until you sell shares. |
Types of Funds | Mutual funds can be stock (equity) funds, bond funds, or money market funds. They can also combine these type of assets in various types of hybrid funds. Within in each of these asset types there are numerous types of funds. Stock fund types include growth, value, growth and income, international, sector, and specialty. Bond fund types include municipal bonds, government bonds, corporate bonds, and junk bonds. Money market funds invest in Treasury bills, commercial paper, banker's acceptances, negotiable certificates of deposit, repurchase agreements and short-term debts of the U.S. Government.
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