Investing in Mutual Funds
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Over the past decade, American investors increasingly have turned to mutual funds to save for retirement and other financial goals. Mutual funds can offer the advantages of diversification and professional management.
But, as with other investment choices, investing in mutual funds involves risk. And fees and taxes will diminish a fund's returns. It pays to understand both the upsides and the downsides of mutual fund investing and how to choose products that match your goals and tolerance for risk.
How Mutual Funds Work
What They Are
A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio. Each share represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate.
Some of the traditional, distinguishing characteristics of mutual funds include the following:
- Investors purchase mutual fund shares from the fund itself (or through a broker for the fund) instead of from other investors on a secondary market, such as the New York Stock Exchange or Nasdaq Stock Market.
- The price that investors pay for mutual fund shares is the fund's per share net asset value (NAV) plus any shareholder fees that the fund imposes at the time of purchase (such as sales loads).
- Mutual fund shares are "redeemable," meaning investors can sell their shares back to the fund (or to a broker acting for the fund).
- Mutual funds generally create and sell new shares to accommodate new investors. In other words, they sell their shares on a continuous basis, although some funds stop selling when, for example, they become too large.
- The investment portfolios of mutual funds typically are managed by separate entities known as "investment advisers" that are registered with the SEC.
Key Points to Remember
- Mutual funds are not guaranteed or insured by the FDIC or any other government agency - even if you buy through a bank and the fund carries the bank's name. You can lose money investing in mutual funds.
- Past performance is not a reliable indicator of future performance. So don't be dazzled by last year's high returns. But past performance can help you assess a fund's volatility over time.
- All mutual funds have costs that lower your investment returns. Shop around, and use a mutual fund cost calculator at www.sec.gov/investor/tools.shtml to compare many of the costs of owning different funds before you buy.
Source: http://www.sec.gov/investor/pubs/inwsmf.htm
WE HAVE PROVIDED THIS INFORMATION AS A SERVICE TO INVESTORS. IT IS NOT A LEGAL INTERPRETATION. NEITHER IS IT AN INTERPRETATION OF OR A STATEMENT ABOUT SEC POLICY. IF YOU HAVE QUESTIONS CONCERNING THE MEANING OR APPLICATION OF A PARTICULAR LAW OR RULE, PLEASE CONSULT WITH AN ATTORNEY WHO SPECIALIZES IN SECURITIES LAW.