Mutual Funds Basics

There are a number of investment options available. Many people have chosen mutual funds as their primary means of investing. Mutual funds provide professional management, diversification, convenience and liquidity. As with all investments, mutual funds are not risk free. It is essential that you make an informed investment decision and choose a mutual fund which is right for you depending on your goals, investment time frame and risk tolerance.

Over the long-term, the success (or failure) of your investment in a fund also will depend on factors such as:

Fund's sales charges, fees, and expenses;
Taxes you may have to pay when you receive a distribution;
Age and size of the fund;
Fund's risks and volatility;
Recent changes in the fund's operations.

When you invest in a mutual fund, your money is combined or pooled with the money of other investors and used to purchase specific types of securities. Mutual funds are run by investment professionals who decide which investments to buy or sell for the fund. The professional picks from a wide variety of stocks, bonds, money market instruments, or other financial instruments. The investments selected will depend on the fund's investment objectives. That's why it's so important for you to choose a fund with objectives compatible with yours.

Generally, the success of your investments over time will depend largely on how much money you have invested in each of the major asset classes – stocks, bonds, and cash – rather than on the particular securities you hold. When choosing a mutual fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk.

The types of investments that a mutual fund holds, its investment goals, the fees charged, and information about who manages and advises the fund are described in a prospectus . You should receive and review a prospectus before investing.

The prospectus usually tells you how well the fund has performed in the past. This information can give you an idea about what you might earn on your investment. As with all investments, however, past performance is no guarantee of future results. All investments carry some risk, including loss of principal.

Remember; don't focus too much on returns. Any track record under 5 years is noise. Try to take a look at how a fund has done over longer periods of time and try to compare it to it peers or an index that represents the type of asset class the fund is in. It is not fair to compare a government bond fund to the NASDAQ.

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