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Understanding mutual funds

What is a mutual fund?
A mutual fund is a “pool” of investments owned by many investors. When you put money into a mutual fund, the fund invests the money with the goal to produce gains and/or income for each investor’s fund account. The fund’s portfolio might be made up of a few dozen to hundreds of different securities.
 
To invest in mutual funds, you buy shares in it, and each share you own represents your portion of the entire pool of investments owned by the fund. Everyone invested in the fund shares in the gains and losses of underlying fund investments. Mutual funds are a popular choice because they offer investors a simple way to diversify and give them easy access to their money when they need it. Mutual funds can help meet your short-term, medium-term and long-term financial goals.
What are the types of mutual funds?
There are lots of different kinds of mutual funds. Here’s an overview of mutual fund categories:
Evaluate funds by
 
ASSET CLASS
What to consider
 
Funds are categorized by the primary asset class they invest in, like:
  • Equities (stocks, including U.S. or international)
  • Fixed-income investments (short-term or long-term bonds)
  • Cash equivalents (short-term CDs or U.S. Treasury bills)
  • Natural resources, precious metals, commodities (corn, wheat or soybeans)
  • Real estate
  • Multi-asset: A combination of different asset classes
Evaluate funds by
 
Investment Objective
What to consider
 
A fund’s objective may be to achieve:
 
  • Capital appreciation (a rise in the value of assets; common for stock funds)
  • Income (typically in the form of ongoing dividends; common for bond funds)
  • Preservation of capital (minimizing a loss in the value of assets)
  • A combination of objectives
Evaluate funds by
 
Investment Technique
What to consider
 
Some funds are identified by the technique or strategy they follow. For example:
  • Lifecycle, or target date, funds invest in other funds to provide an investment mix that gets more conservative as the target date (year) approaches.1
  • Stock funds can focus on companies in a certain industry, like biotech or retail
  • Geographic region, such as U.S. or Europe
Evaluate funds by
 
Management Style (Active or Passive)
What to consider
 
Funds are also categorized by how they pick their investments.
 
  • An actively managed fund’s investment manager regularly makes decisions on which securities to buy, sell or hold
  • A passively managed fund (also known as an index fund ) minimizes trades, and management costs, by mimicking the makeup and performance of a specific market index like the S&P 500
How can a mutual fund help?
Here are some of the benefits of a mutual fund: 
  • May lower your risk. Each mutual fund share you buy gives instant
    diversification , which helps reduces the risk of having too many eggs in one basket. 
  • Managed by a professional. Buying shares in an actively managed  fund gives you access to a professionally managed, diversified portfolio that would be difficult to create on your own. 
  • Low initial investment amount. Depending on the mutual fund, you might be able to start with a low amount, and the fund might also allow your future contributions to be small. You can even set up automatic, ongoing investments through transfers of money from your bank account. 
  • Easy to buy and sell your shares. You might be able to buy shares directly from the fund or through an investment broker or financial institution. Funds also offer easy access to your money when you need it—to sell your shares, contact the fund manager or ask your dealer or broker to sell them for you. 
 
What are the risks of a mutual fund?
Like all investments, mutual funds can come with some risk, and come in a variety of risk and return profiles. For example, a fund that invests in stocks of “hot” start-up companies may pose more risk (and possibly provide a higher long-term return) than a fund that invests mostly in bonds, which offer more moderate risk and a moderate return.
 
How to choose a fund
Before investing in a certain mutual fund, think about your goals, how much risk you’re comfortable with and your time horizon. Many mutual fund company websites include information that helps you sort through their funds using different factors. 
 
Every fund has a prospectus a legal document that shows important details about the fund, including its investment objectives and technique, performance history, and any fees or commissions associated with that fund.

You should consider the investment objectives, risks, charges and expenses carefully before investing. Call 877-518-9161 for product and fund prospectuses that contain this and other information. Please read the prospectuses carefully before investing.

 
1Please note, the target date for Lifecycle funds is the approximate date when investors plan to start withdrawing their money. The principal value of the fund(s) is not guaranteed at any time, including at the target date.
 

There are inherent risks in investing in securities Products may be subject to market and other risk factors. It is possible to lose money by investing in securities.

Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.

 
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