An Introduction toAn Introduction to

What are Mutual Funds?What are Mutual Funds?

Mutual funds are a type of investment Mutual funds are a type of investment that takes money from many investors that takes money from many investors and uses it to make investments based and uses it to make investments based on a stated investment objective.on a stated investment objective.

Each shareholder in the mutual fund Each shareholder in the mutual fund participates proportionally (based upon participates proportionally (based upon the number of shares owned) in the gain the number of shares owned) in the gain or loss of the fund.or loss of the fund.

Why do People Invest in Why do People Invest in Mutual Funds?Mutual Funds?

Mutual funds offer investors an affordable way to Mutual funds offer investors an affordable way to diversify their investment portfolios. diversify their investment portfolios.

Mutual funds allow investors the opportunity to have a Mutual funds allow investors the opportunity to have a financial stake in many different types of investments.financial stake in many different types of investments.

These investments include: stocks, bonds, money These investments include: stocks, bonds, money markets, real estate, commodities, etc…markets, real estate, commodities, etc…

Individually, an investor may be able to own stock in a Individually, an investor may be able to own stock in a few companies, a few bonds, and have money in a few companies, a few bonds, and have money in a money market account. Participation in a mutual fund, money market account. Participation in a mutual fund, however, allows the investor to have much greater however, allows the investor to have much greater exposure to each of these asset classes.exposure to each of these asset classes.

ContinuedContinued

Most mutual funds are professionally managed Most mutual funds are professionally managed by an investment expert known as a portfolio by an investment expert known as a portfolio manager. manager.

This individual makes all of the buying and This individual makes all of the buying and selling decisions for the fund.selling decisions for the fund.

There are thousands of different mutual funds There are thousands of different mutual funds in the United States. in the United States.

This provides investors with many options to This provides investors with many options to help them achieve their investment objectives.help them achieve their investment objectives.

Basic Mutual Fund Basic Mutual Fund CategoriesCategories

Mutual Funds can be divided into four Mutual Funds can be divided into four basic categories based upon the funds basic categories based upon the funds investment objective.investment objective.

These categories are:These categories are:1.1. Money Market Mutual FundsMoney Market Mutual Funds2.2. Stock Mutual FundsStock Mutual Funds3.3. Bond Mutual FundsBond Mutual Funds4.4. Balanced Mutual FundsBalanced Mutual Funds

Money Market Mutual Money Market Mutual FundsFunds

Money Market Mutual Money Market Mutual FundsFunds

This is the most conservative type of mutual fund.This is the most conservative type of mutual fund. The goal is to maintain the $1 value of its shares while The goal is to maintain the $1 value of its shares while

providing income. providing income. Invests in high-quality, short-term securities such as Invests in high-quality, short-term securities such as

certificates of deposit, U.S. Treasury Bills, and U.S. certificates of deposit, U.S. Treasury Bills, and U.S. Treasury Notes. Treasury Notes.

MMMF’s are an appropriate place for savings. MMMF’s are an appropriate place for savings. These funds have typically offered higher interest rates These funds have typically offered higher interest rates

than bank savings accounts. than bank savings accounts. Money market mutual funds are not insured by the Money market mutual funds are not insured by the

FDIC.FDIC.

Stock Mutual FundsStock Mutual Funds

Type of fund that invests in stocks.Type of fund that invests in stocks. These funds are also known as equity funds.These funds are also known as equity funds. There are many different types of stock mutual There are many different types of stock mutual

funds. funds. Some of the most common include:Some of the most common include:Large-cap funds, mid-cap funds, small-cap funds, Large-cap funds, mid-cap funds, small-cap funds,

income funds, growth funds, value funds, blend income funds, growth funds, value funds, blend funds, international funds, and sector funds.funds, international funds, and sector funds.

We will take a closer look at each of these We will take a closer look at each of these different types of stock mutual funds.different types of stock mutual funds.

Large-Cap Stock FundsLarge-Cap Stock Funds

These mutual funds invest in companies with These mutual funds invest in companies with market capitalizations in excess of 10 billion dollars.market capitalizations in excess of 10 billion dollars.

Most stocks held in a large-cap fund are from firms Most stocks held in a large-cap fund are from firms with established and profitable businesses. with established and profitable businesses.

Large-cap stock funds are less volatile and Large-cap stock funds are less volatile and considered safer than mid-cap and small-cap stock considered safer than mid-cap and small-cap stock funds.funds.

Large-cap stock funds do not offer as much growth Large-cap stock funds do not offer as much growth potential as mid-cap and small-cap stock funds.potential as mid-cap and small-cap stock funds.

Mid-Cap Stock FundsMid-Cap Stock Funds

These mutual funds invest in companies with These mutual funds invest in companies with market capitalizations between 2 and 10 billion market capitalizations between 2 and 10 billion dollars.dollars.

Most stocks held in a mid-cap fund are from Most stocks held in a mid-cap fund are from firms with established businesses that are still firms with established businesses that are still expanding and growing. expanding and growing.

These funds tend to offer more growth than These funds tend to offer more growth than large-cap stocks and less volatility than small-large-cap stocks and less volatility than small-cap stocks.cap stocks.

Small-Cap Stock FundsSmall-Cap Stock Funds

These mutual funds invest in companies with These mutual funds invest in companies with market capitalizations between 300 million and market capitalizations between 300 million and 2 billion dollars.2 billion dollars.

Most stocks held in a small-cap fund are from Most stocks held in a small-cap fund are from firms with innovative businesses that are still firms with innovative businesses that are still growing and developing. growing and developing.

These funds tend to offer more growth These funds tend to offer more growth potential than large-cap and mid-cap funds.potential than large-cap and mid-cap funds.

However, small-cap stock funds are much However, small-cap stock funds are much more volatile.more volatile.

Good News!Good News!

It is time for us to begin watching a It is time for us to begin watching a Nightly Business Report Video on Mutual Nightly Business Report Video on Mutual Funds!Funds!

With a question sheet of course!With a question sheet of course!

Income Stock FundsIncome Stock Funds

These are also known as equity income These are also known as equity income funds.funds.

These funds include stocks of companies These funds include stocks of companies with a long history of paying dividends.with a long history of paying dividends.

The major objective of an income stock The major objective of an income stock fund is to provide steady income to fund is to provide steady income to investors.investors.

Growth Stock FundsGrowth Stock Funds

These funds invest in stocks with the potential These funds invest in stocks with the potential for long-term growth.for long-term growth.

This means that there is the potential that This means that there is the potential that these stocks will increase significantly in value.these stocks will increase significantly in value.

The stocks of companies that are experiencing The stocks of companies that are experiencing growth in earnings and revenue are the types growth in earnings and revenue are the types of stocks found in growth stock mutual funds.of stocks found in growth stock mutual funds.

Value Stock FundsValue Stock Funds

These funds invest in companies that are thought to be These funds invest in companies that are thought to be good bargains.good bargains.

These funds invest in stocks that have fallen out of These funds invest in stocks that have fallen out of favor with mainstream investors for one reason or favor with mainstream investors for one reason or another.another.

Value stocks are often the stocks of established Value stocks are often the stocks of established companies that have stopped growing and that use companies that have stopped growing and that use their earnings to pay dividends. their earnings to pay dividends.

Value funds produce current income (from the Value funds produce current income (from the dividends) as well as the potential for long-term growth dividends) as well as the potential for long-term growth (from capital appreciation once the stocks become (from capital appreciation once the stocks become popular again).popular again).

Blend Stock FundsBlend Stock Funds

These funds invest in the stocks of These funds invest in the stocks of companies that are classified as “growth” companies that are classified as “growth” stocks and “value” stocks.stocks and “value” stocks.

The growth stocks are designed to The growth stocks are designed to provide long-term appreciation in value.provide long-term appreciation in value.

The value stocks are designed to provide The value stocks are designed to provide dividend income and future growth.dividend income and future growth.

International Stock FundsInternational Stock Funds

These funds include the stocks of foreign These funds include the stocks of foreign companies that are sold in securities markets companies that are sold in securities markets throughout the world.throughout the world.

International funds may invest in stocks from International funds may invest in stocks from throughout the world or from a particular nation throughout the world or from a particular nation or region.or region.

Potentially, these funds can provide a Potentially, these funds can provide a tremendous amount of growth, however, they are tremendous amount of growth, however, they are also considered to be riskier than other types of also considered to be riskier than other types of stock funds.stock funds.

Sector Stock FundsSector Stock Funds

Type of fund that invests in a single Type of fund that invests in a single sector of the economy or industry, such sector of the economy or industry, such as biomedical research, real estate or as biomedical research, real estate or precious metals. precious metals.

Sector funds often generate erratic Sector funds often generate erratic performance and usually are either at the performance and usually are either at the top or the bottom of the mutual fund top or the bottom of the mutual fund performance rankings.performance rankings.

Index FundsIndex Funds

These are mutual funds whose holdings aim to These are mutual funds whose holdings aim to track the performance of a specific stock track the performance of a specific stock market index.market index.

The most common index fund tracks the S&P The most common index fund tracks the S&P 500. These index funds invest in the exact 500. These index funds invest in the exact stocks (and in the same percentages) as those stocks (and in the same percentages) as those found in the S&P 500.found in the S&P 500.

Index funds have lower costs than actively Index funds have lower costs than actively managed funds.managed funds.

Bond Mutual FundsBond Mutual Funds

Type of mutual fund that invests in Type of mutual fund that invests in bonds.bonds.

There are different types of bond mutual There are different types of bond mutual funds.funds.

TypicallyTypically, bond mutual funds have the , bond mutual funds have the objective of providing stable income with objective of providing stable income with minimal risk.minimal risk.

Types of Bond Mutual Types of Bond Mutual FundsFunds

We are going to talk about the following We are going to talk about the following types of bond mutual funds:types of bond mutual funds:

Short, Intermediate, and Long-Term U.S. Short, Intermediate, and Long-Term U.S. Bond FundsBond Funds

Short, Intermediate, and Long-Term Short, Intermediate, and Long-Term Corporate Bond FundsCorporate Bond Funds

Municipal Bond FundsMunicipal Bond Funds High-Yield (junk) Bond FundsHigh-Yield (junk) Bond Funds

U.S. Bond Mutual FundsU.S. Bond Mutual Funds

Short-Term- invests in T-Bills and T-Notes Short-Term- invests in T-Bills and T-Notes that have maturities of less than five yearsthat have maturities of less than five years

Intermediate- invests in government Intermediate- invests in government securities that have maturities between securities that have maturities between five and ten yearsfive and ten years

Long-Term- invests in government Long-Term- invests in government securities that have maturities longer than securities that have maturities longer than ten yearsten years

Corporate Bond Mutual Corporate Bond Mutual FundsFunds

Corporate bond mutual funds are also Corporate bond mutual funds are also classified by the maturity dates of the classified by the maturity dates of the bonds held by the fund. They are divided bonds held by the fund. They are divided into short-term, intermediate, and long-into short-term, intermediate, and long-term.term.

The same maturity rules apply for The same maturity rules apply for corporate bond mutual funds as with U.S. corporate bond mutual funds as with U.S. bond mutual funds. bond mutual funds.

Municipal Bond Mutual Municipal Bond Mutual FundsFunds

These mutual funds invest in municipal These mutual funds invest in municipal bonds and provide investors with tax-free bonds and provide investors with tax-free interest income.interest income.

There are also insured municipal bond There are also insured municipal bond mutual funds. An outside insurance mutual funds. An outside insurance company protects investors from a company protects investors from a possible default by the municipality.possible default by the municipality.

High Yield (Junk) Bond High Yield (Junk) Bond Mutual FundsMutual Funds

These mutual funds invest in high yield, These mutual funds invest in high yield, high risk corporate bonds.high risk corporate bonds.

These are the riskiest type of bond These are the riskiest type of bond mutual fund. However, these are also the mutual fund. However, these are also the most potentially rewarding type of bond most potentially rewarding type of bond mutual fund.mutual fund.

Balanced Mutual FundsBalanced Mutual Funds

These are also known as hybrid funds.These are also known as hybrid funds. These mutual funds invest in stocks, These mutual funds invest in stocks,

bonds, and money markets. bonds, and money markets. These are very diversified mutual funds. These are very diversified mutual funds.

The stock portion of the fund provides the The stock portion of the fund provides the potential for capital appreciation, while potential for capital appreciation, while the bond and money market portion the bond and money market portion provide income.provide income.

The Mutual Fund The Mutual Fund ProspectusProspectus

This is a legal document which describes This is a legal document which describes the investment objective of the fund, the the investment objective of the fund, the manner in which the fund is administered manner in which the fund is administered and operated, the fees and other pertinent and operated, the fees and other pertinent information. information.

The prospectus should be read thoroughly The prospectus should be read thoroughly before making an investment decision.before making an investment decision.

Load v. No Load Mutual Load v. No Load Mutual FundsFunds

A mutual fund that charges a commission to A mutual fund that charges a commission to cover its administrative costs is called a load cover its administrative costs is called a load fund. fund.

A front-end load charges the load when the A front-end load charges the load when the shares are purchased, while a back-end load shares are purchased, while a back-end load charges the load when the shares are sold.charges the load when the shares are sold.

A no-load mutual fund doesn’t charge a A no-load mutual fund doesn’t charge a purchase or sales commission.purchase or sales commission.

Major Mutual Fund Major Mutual Fund CompaniesCompanies

Vanguard, Fidelity, and T. Rowe Price Vanguard, Fidelity, and T. Rowe Price are three of the world’s major mutual are three of the world’s major mutual fund companies.fund companies.

http://vanguard.com http://fidelity.com http://troweprice.com