A mutual fund is an investment company that pools the money of many investors and invests it on their behalf. Based on a fund’s stated objective, the money is invested in stocks, bonds, money market securities, or a combination of these. At the end of 2004, there were about 8,000 mutual funds with 267 mil- lion accounts worth in excess of $8.1 trillion. All investments have an element of risk. Mutual funds are no different. And, with so many choices, great care should be exercised to find a fund that is right for you.
Mutual Fund Charges
There are four types of potential charges to mutual fund investors. Some funds have front-end loads of two percent to eight percent of your initial investment. This generally goes to pay a commission to the person who sold you the fund. Some funds have back-end loads of one percent to six percent on money taken out. Often these charges are on a declining schedule so that if you leave your money with the fund for, say, five years, there is no longer a charge. No-load funds do not impose these charges. All funds charge an administration fee for handling your investments although the charge varies, usually rising to 1.5 percent. Some funds impose a 12b-1 charge. This is a Securities and Exchange Commission regulation that allows a fund to pass on certain advertising and marketing expenses. Many funds include these expenses as part of their administration fee. When considering a mutual fund, be sure to consider all the costs against the fund’s performance history. What have been the net results?
Information on Mutual Funds
To help sort through the enormous array of choices, turn to the information services available. Good resources include Investor’s Guide and Mutual Fund Directory available from the No-Load Mutual Fund Association, 11 Penn Plaza, Suite 2204, New York City, NY 10001, and The Guide to Mutual Funds available from the Investment Company Institute, 1600 M Street NW, Suite 600, Washington, DC 20036. Morningstar, Inc. does a complete analytical report on all mutual funds biweekly and rates fund performance. The service is too expensive for the aver- age investor, but check with your local library or banker for a copy. Morningstar reports are also available on the Internet at www.morningstar.com. Finally, Money, Kiplinger, Business Week, Consumer Reports, and Forbes rank mutual fund performance at least once a year.
Reasons for Investing in Mutual Funds
Mutual funds appeal to such a large number of investors for many valid reasons. Here are the ones most often cited.
Diversification: Your investment is pooled with others and spread among a large number of securities. This reduces the potential for any one investment having a significant negative effect on the total portfolio.
Professional Management: Few investors have the time or knowledge to analyze companies and securities, study forces that influence the economy, and assess trends in financial markets. With mutual funds, individual investors gain access to professional portfolio management at bargain rates.
Liquidity: Mutual fund shares can be sold at any time at their current market value. They are subject to market risk.
Convenience: You can add to your mutual fund holdings at any time. Additionally, record-keeping is simplified by the periodic reports and tax information provided. Withdrawals are also convenient. Many funds will mail you a monthly check while others offer check-writing privileges.
Affordability: The minimum initial investment for most funds is between $500 and $2,500. Additional investments are usually a minimum of $50.However, a few funds will accept $25 additions as long as a regular investment program is set up.
Regulation: Mutual funds are regulated by a number of federal and state laws. They are also subject to the regulations of the Securities and Exchange Commission. This has led to a high level of confidence among mutual fund investors that they will be treated according to the published materials issued by the funds.
Flexibility: Many mutual fund families such as Vanguard, T. Rowe Price, and Fidelity allow investors to move savings among their different funds without charge. Some others charge a modest exchange fee. This permits investors to change their investments, as their financial needs change.
