Mutual Funds

MUTUAL FUNDS
A mutual fund is a financial vehicle that pools assets from shareholders to invest in
securities like stocks, bonds, money market instruments, and other assets. Mutual funds
are operated by professional money managers, who allocate the fund's assets and attempt
to produce capital gains or income for the fund's investors. A mutual fund's portfolio is
structured and maintained to match the investment objectives stated in its prospectus.
How Are Mutual Funds Priced?

The value of the mutual fund depends on the performance of the securities in which it
invests. When buying a unit or share of a mutual fund, an investor is buying the
performance of its portfolio or, more precisely, a part of the portfolio's value. Investing in a
share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual
fund shares do not give their holders any voting rights. A share of a mutual fund represents
investments in many different stocks or other securities.
The price of a mutual fund share is referred to as the net asset value (NAV) per share,
sometimes expressed as NAVPS. A fund's NAV is derived by dividing the total value of the
securities in the portfolio by the total amount of shares outstanding. Outstanding shares are
those held by all shareholders, institutional investors, and company officers or insiders.
Types of Mutual Funds

There are several types of mutual funds available for investment, though most mutual funds
fall into one of four main categories which include stock funds, money market funds, bond
funds, and target-date fund.
Stock Funds
As the name implies, this fund invests principally in equity or stocks. Within this group are
various subcategories. Some equity funds are named for the size of the companies they
invest in: small-, mid-, or large-cap. Others are named by their investment approach:
aggressive growth, income-oriented, value, and others.
Bond Funds
A mutual fund that generates a minimum return is part of the fixed income category. A
fixed-income mutual fund focuses on investments that pay a set rate of return, such as
government bonds, corporate bonds, or other debt instruments. The fund portfolio
generates interest income, which is passed on to the shareholders.
Sometimes referred to as bond funds, these funds are often actively managed and seek to
buy relatively undervalued bonds in order to sell them at a profit. These mutual funds are
likely to pay higher returns and bond funds aren't without risk.
Index Funds
Index Funds invest in stocks that correspond with a major market index such as the S&P
500 or the Dow Jones Industrial Average (DJIA). This strategy requires less research from
analysts and advisors, so there are fewer expenses passed on to shareholders and these
funds are often designed with cost-sensitive investors in mind.
Balanced Funds
Balanced funds invest in a hybrid of asset classes, whether stocks, bonds, money
market instruments, or alternative investments. The objective of this fund, known as an
asset allocation fund, is to reduce the risk of exposure across asset classes.
Some funds are defined with a specific allocation strategy that is fixed, so the investor can
have a predictable exposure to various asset classes. Other funds follow a strategy for
dynamic allocation percentages to meet various investor objectives. This may include
responding to market conditions, business cycle changes, or the changing phases of the
investor's own life.
Money Market Funds

The money market consists of safe, risk-free, short-term debt instruments, mostly
government Treasury bills. An investor will not earn substantial returns, but the principal is
guaranteed. A typical return is a little more than the amount earned in a regular checking or
savings account and a little less than the average certificate of deposit (CD).
Income Funds
Income funds are named for their purpose: to provide current income on a steady basis.
These funds invest primarily in government and high-quality corporate debt, holding these
bonds until maturity to provide interest streams. While fund holdings may appreciate, the
primary objective of these funds is to provide steady cash flow to investors. As such, the
audience for these funds consists of conservative investors and retirees.
International/Global Funds
An international fund, or foreign fund, invests only in assets located outside an investor's
home country. Global funds, however, can invest anywhere around the world. Their
volatility often depends on the unique country's economy and political risks. However, these
funds can be part of a well-balanced portfolio by increasing diversification, since the returns
in foreign countries may be uncorrelated with returns at home.

Mutual Funds

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Mutual Funds

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MUTUAL FUNDS

How Are Mutual Funds Priced?

Types of Mutual Funds

Money Market Funds

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