When you purchase shares in a mutual fund, your dollars are invested in a large number of companies all at once, and your investment risk is spread out over many stocks of many companies, not just one. With mutual funds, your potential for risk is less. The ups and downs in the value of your investment are potentially less with a mutual fund than with an individual stock because you are more diversified.
Mutual funds make it easy for you to invest in stocks and bonds. The two main advantages of investing your money in mutual funds are 1) you receive professional money management and 2) you are able to truly diversify your holdings with a small sum of money.
Each mutual fund has one or more fund managers who are skilled in the principles of money management. They have access to a huge database of research—so basically, you're leaving the driving to them.
Each fund also has a particular objective. That objective is defined in the fund's prospectus, which describes a mutual fund and offers its shares for sale. The prospectus provides information such as investment objectives, charges, expenses, and operating policies. A prospectus must be provided to an investor at the time of sale. The investor should read it carefully before sending money or investing.
The objective could be, for example, long-term growth, current income, or a combination of income and growth. For example, the objective of XYZ fund is long-term growth. To accomplish the fund's objective, the fund manager invests the money received from its shareholders (that's you) by purchasing shares of many individual companies (or leaving a small portion in cash).
Some stock mutual funds can own shares of stock from a few hundred companies, thereby limiting their holdings in any one company to no more than 5–6 percent of all the assets in the mutual fund. This is true diversification and your risk may be less than if you invested in just one or two individual stocks.
Let's look at the different choices available.
Type of Fund
International Stocks and Bonds
Global Stocks and Bonds
Aggressive Growth Fund
Growth and Income Fund
Stocks and Bonds
Asset Allocation Fund
Corporate Bond Fund
Mortgage-Backed Bond Fund
Single-State, Tax-Exempt Bond Fund
Municipal Bond Fund
U.S. Government Bond Fund
Money Market Fund
IMPORTANT NOTE: Seeking higher returns will be subject to great risks.
IMPORTANT NOTE: With all mutual funds, the value of your investment could decline so you could lose money. Funds are subject to the general risks associated with the markets and securities in which they invest, including the risk that the value of a portfolio may be impacted gradually or sharply by general conditions of the market, changes in interest rates, or the performance of an individual company, industry, or economy. You should consider a fund's investment objectives, risk, charges, and fees carefully before investing. This and other important information about the investment company are contained in the prospectus, which can be obtained from your financial professional and should be read carefully before investing. Investment return and principal value may fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Investing in mutual funds involves risk, including possible loss of principal.
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