A Guide to Understanding Mutual
What Mutual Funds
Can do for You
By investing in mutual funds,
you can put expert money managers to work to help you achieve your financial
goals, whether you're saving for retirement, planning for your children's
education or saving for any special need. Before investing, you'll want
to understand the basics of mutual funds. The following document is designed
to help you meet this purpose.
Mutual funds, annuities, and
other investment products:
- are not insured by the FDIC,
or any other government agency;
- are not deposits or other
obligations of, or guaranteed by, any bank or any affiliate; and
- are subject to investment
risks, including possible loss of principal amount invested.
Simply put, a mutual fund is
a company that makes investments on behalf of its shareholders.
The fund pools your money with
money from many other people who have similar investment objectives. Professional
money managers then take the pool of money and invest it in securities,
such as stocks, bonds and money market instruments.
Mutual funds can make money
for you in two ways. One, they can pay dividends earned from the funds'
investments. And two, if a security held by a fund is sold at a profit,
the fund can pay capital gains.
As a shareholder, you own a
proportionate share of the fund. Each share represents ownership in all
the fund's underlying securities. Funds pay dividends and capital gains
in proportion to the number of fund shares owned. Thus, if you invest
$1,000 you'll get the same rate of return as if you invest $10,000.
Mutual Funds Provide
the Basics for Smart Investing
Your best protection against
risk is diversification--spreading your investment across dozens of securities
instead of just one.
Mutual funds provide an assortment
of investment options. They offer growth, income, or both, and the opportunity
to invest in international markets, as well as the U.S. A fund's portfolio
manager typically invests in as many as 50 to 200 or more different securities.
In effect, they put your money in many baskets instead of just one. Only
the most affluent investors can attain the diversification on their own
that mutual funds can for their shareholders.
With mutual funds, you have
built-in professional money managers who base their buying and selling
decisions on extensive, ongoing economic research. After analyzing stock
market conditions, interest rates, inflation and the financial performances
of individual companies, these managers select investments that best match
the fund's objectives.
Professional money management
has long been available to large institutions and wealthy investors. Mutual
funds make this type of financial expertise accessible to everyone.
Mutual funds create the possibility
of higher long-term returns than conventional savings. Today, mutual funds
manage more than 114.9 million shareholder accounts valued at about $2.16
trillion. They have become the nation's third largest financial intermediary--behind
commercial banks and life insurance companies.
One reason for mutual fund
growth is their performance record in relation to what individuals might
expect by investing on their own.
Of course, performance varies
from fund to fund, but on average and over the long run, the growth of
stock funds has paralleled the growth in the U.S. economy. Additionally,
bond and money market funds have reflected the long term movements in
their respective markets.
Investing Can Be a
Piece of Cake
Mutual funds are easy to buy
at a bank or trust company. For example, you can purchase mutual funds
through a professional investment representative who can help you analyze
your financial needs and objectives and recommend appropriate funds. You
can get your investment program started for as little as $500. Subsequent
investments can be made for as little as $50.
You also have easy access to
your money, making your investment a liquid asset. You can generally redeem
all or part of your shares any day the New York Stock Exchange is open
and receive the current value of the investment, which may be more or
less than the original cost. Payment for redeemed shares will generally
be made within seven days.
- Mutual funds began in the
- Over $2.16 trillion in assets
- 114.9 million individual
- 31% of all U.S. Households
Mutual funds offer various
features that allow you to stay in control of your investments.
Automatic Reinvestment of Dividends
and/or Capital Gains.
Most mutual funds allow you
to automatically reinvest your dividends and capital gains in the purchase
of additional fund shares at no extra cost. Over time, the power of compounding
can significantly increase the value of your assets.
Within a fund family, you can
generally exchange portions of your investment into other funds with different
objectives as your financial situation changes.
Rundown on Securities
A stock is an equity security
that represents part ownership in a corporation. Stocks are sold in shares
and their prices will change. The Standard & Poor's Composite Index
of 500 Stocks (S&P 500) measures the general price movement of a group
of unmanaged securities. It is widely regarded by investors to be representative
of the stock market in general.
A bond is essentially a debt
security or IOU, usually issued by a corporation, government or government
agency. Most bonds pay interest, which is distributed to the bondholder
at specific intervals. Bond prices will vary, and their price movements
are strongly affected by changes in interest rates.
Money Market Instruments
In many ways, most money market
securities are just short-term investments because the debt that they
represent must be paid back within a relatively brief period of time,
no more than one year. With such short maturity periods, the prices of
money market instruments are generally more stable than prices of longer-term
debt securities. However, money market securities usually pay less interest
than longer-term bonds.
Treasury bills and certificates
of deposit (CDs) are two examples of commonly-issued money market instruments.
In addition, CDs are insured by the FDIC for up to $100,000, and Treasury
bills offer a government guarantee as to the repayment of principal and
interest if held to maturity.
A mutual fund invests in securities
that fit its specific objective. For example, if a fund's investment objective
is current income, it will want to invest in bonds or stocks which can
produce current earnings or dividends. The fund turns around and pays
its shareholders from those dividends. Now let's suppose there's a rally
in the stock market. If prices of the securities held by a mutual fund
increase, and the fund sells a portion of its holdings for a higher price
than it originally paid for them, it realizes a capital gain. The fund
may then pass that gain on to its shareholders as a capital gains distribution.
Types of Mutual Funds
There are funds that fit just
about any investment need:
Aggressive Growth Funds seek maximum capital gains as
their investment objective. These funds may invest in stocks that are
somewhat out of the mainstream--such as smaller, lesser-known companies
that managers believe possess dynamic potential. Current income isn't
a significant factor for shareholders in these funds.
Growth Funds typically
invest in stocks and seek capital growth through the price appreciation
of the securities held in their portfolio. Their primary aim is to produce
an increase in the value of their investments rather than a flow of dividends.
Growth and Income Funds invest primarily in the common stock of companies with longer track records.
These funds have the expectation of a higher share value but also maintain
a solid record of paying dividends.
Balanced Funds invest in both stocks and bonds. They emphasize the growth potential of
stocks as well as the relative stability of income from bonds.
Income Funds seek
a high level of current income, which is often achieved by investing in
the common stock of companies with good dividend-paying records. They
may invest in such fixed-income securities as corporate and government
bonds. Some income funds maintain more aggressive objectives than others:
High-yield corporate bonds have potential to produce greater income than
government bonds. In turn, government bonds are considered less volatile
than high-yield bonds.
Municipal Bond Funds invest in bonds issued by local governments--such as cities--which use
the money to build such public buildings as schools. Income earned from
these securities is usually federally tax-exempt for most shareholders.
Money Market Funds participate in short-term investment instruments that are considered the
safest, most stable type of securities available. By investing in such
funds, shareholders can earn current money market interest rates and maintain
asset liquidity. In addition, these funds may specialize by investing
in tax-exempt money market securities.
Mutual fund performance will vary. An investor's shares, when redeemed,
may be worth more or less than original cost. Higher-yielding bonds have
a greater risk of price fluctuation and loss of principal and income than
U.S. Government Securities, which guarantee repayment of principal and
interest if held to maturity. Always read the prospectus(es) carefully
before you invest or send money.
* Courtesy of AIM Distributors,