Mutual Funds 101

I have prepared a really helpful document for those who are interested in investing in MUTUAL FUNDS. You can read this before you may want to invest your hard earned money to MUTUAL FUNDS…

1. Prospectus - The fund’s selling document and contains information about costs,
risks, past performance, and the fund’s investment goals. Read the prospectus before you invest.

2. Net Asset Value per share (NAV) - NAV is the value of one share in a fund. When you buy shares, you pay the current NAV per share, plus any sales charge (also called a sales load). When you sell your shares, the fund will pay you NAV less any other sales load (See Part V “Comparing Different Funds”). A fund’s NAV goes up or down daily as its holdings change in value.

3. Derivatives - Financial instruments whose performance is derived, at least in part, from the performance of an underlying asset, security or index. Their value can be affected dramatically by even small market movements, sometimes in unpredictable ways. A fund’s prospectus will disclose how it may use derivatives.

4. MUTUAL FUND CHECKLIST

• Mutual funds are NOT guaranteed or insured by any bank or government agency. Even if you buy through a bank and the fund carries the bank’s name, there is no guarantee. You can lose money.
• Mutual funds ALWAYS carry investment risks. Some types carry more risk than others.
• Understand that a higher rate of return typically involves a higher risk of loss.
• Past performance is not a reliable indicator of future performance. Beware of dazzling performance claims.
• ALL mutual funds have costs that lower your investment returns.
• You can buy some mutual funds by contacting them directly. Others are sold mainly through brokers, banks, financial planners, or insurance agents. If you buy through these financial professionals, you generally will pay an extra
  sales charge for the benefit of their advice.
• Shop around. Compare a mutual fund with others of the same type before you buy.

5. WHY MUTUAL FUNDS?

• Mutual funds are managed by professional money managers.
• By owning shares in a mutual fund instead of buying individual stocks or bonds directly, your investment risk is spread out.
• Because your mutual fund buys and sells large amounts of securities at a time, its costs are often lower than what you would pay on your own.

6. HOW MUTUAL FUNDS WORK

A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other securities. (The combined holdings of stocks, bonds, or other securities and assets the fund owns are known as its portfolio.) Each investor owns shares, which represent a part of these holdings.

7. HOW FUNDS CAN EARN YOU MONEY

A fund may receive income in the form of dividends and interest on the securities it owns. A fund will pay its shareholders nearly all of the income it has earned in the form of dividends.

The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to
investors.

If a fund does not sell but holds on to securities that have increased in price, the value of its shares (NAV) increases. The higher NAV reflects the higher value of your investment. If you sell your shares, you make a profit (this also is a capital
gain).

Usually funds will give you a choice: the fund can send you payment for distributions and dividends, or you can have them reinvested in the fund to buy more shares, often without paying an additional sales load.

8. TAXES

You will owe taxes on any distributions and dividends in the year you receive them (or reinvest them). You will also owe taxes on any capital gains you receive when you sell your shares. Keep your account statements in order to figure out your taxes at the end of the year.

If you invest in a tax-exempt fund (such as a municipal bond fund), some or all of your dividends will be exempt from federal (and sometimes state and local) income tax. You will, however, owe taxes on any capital gains.

9. KINDS OF MUTUAL FUNDS

• MONEY MARKET FUNDS
  Low risks
  Limited by law to certain high-quality, short-term investments
  Investor losses have been rare, but they are possible
• BOND FUNDS (FIXED INCOME FUNDS)
  Higher risks than money market funds
  Seek to pay higher yields
  NOT restricted to high-quality or short-term investments
  Most bond funds have credit risk
  Market value of the bonds they hold will go down when interest rates go up.
• STOCK FUNDS (EQUITY FUNDS)
  More risk than money market or bond funds
  Offer the highest returns
  Historically stocks have performed better over the long term than other types of investments.
  Most bond funds have credit risk
  Market value of the bonds they hold will go down when interest rates go up.

10. VIEWING PAST PERFORMANCE

Studies show that the future is often different than the past
This year’s “number one” fund can easily become next year’s below average fund

11. TIPS FOR COMPARING PERFORMANCE

Check the fund’s total return. Total return measures increases and decreases in the value of your investment over time, after subtracting costs.
See how total return has varied over the years. An impressive 10-year total return may be based on one spectacular year followed by many average years. Looking at year-to-year changes in total return is a good way to see how stable the fund’s returns have been.

12. COMPARING COSTS

Costs are important because they lower your returns A fund that has a sales load and high expenses will have to perform better than a low-cost fund, just to stay even with the low-cost fund. Sales loads buy you a broker’s services and advice; they do not assure superior performance. Funds that charge sales loads have not performed better on average (ignoring the loads) than those that do not charge sales loads.

13. TERMS TO KNOW

Front-end load - A sales charge you pay when you buy shares. Cannot be higher than 8.5% of your investment. Reduces the amount of your investment in the fund.

Example: If you have $1,000 to invest in a mutual fund with a 5% front-end load, $50 will go to pay the sales charge, and $950 will be invested in the fund.

Back-end load (deferred load) - A sales charge you pay when you sell your shares. Usually starts out at 5% or 6% for the first year and gets smaller each year after that until it reaches zero.

Example: You invest $1,000 in a mutual fund with a 6% back-end load that decreases to zero in the seventh year. Let’s assume for the purpose of this example that the value of your investment remains at $1,000 for seven years. If you sell your shares during the first year, you only will get back $940 (ignoring any gains or losses). $60 will go to pay the sales charge. If you sell your shares during the seventh year, you will get back $1,000.

Management fee - Pays for managing the fund’s portfolio. Rule 12b-1 fee - Used to pay commissions to brokers and other salespersons, and occasionally to pay for advertising and other costs of promoting the fund to investors. It usually is between 0.25% and 1.00% of assets annually. Funds with back-end loads usually have higher rule 12b-1 fees.

14. TIPS FOR COMPARING COSTS

• Beware of a salesperson who tells you, “This is just like a no-load fund.” Even if there is no front-end load, check the fee table in the prospectus to see what other loads or fees you may have to pay.
• Check the fee table to see if any part of a fund’s fees or expenses has been aived. If so, the fees and expenses may increase suddenly when the waiver ends (the part of the prospectus after the fee table will tell you by how much).
• Many funds allow you to exchange your shares for shares of another fund managed by the same adviser. The first part of the fee table will tell you if there is any exchange fee.
• Shop wisely. Compare fees and expenses before you invest.
• Read the sections of the prospectus that discuss the risks, investment goals, and investment policies of any fund that you are considering.
• All mutual funds must prepare a Statement of Additional Information (SAI, also called Part B of the prospectus). It explains a fund’s operations in greater detail than the prospectus. If you ask, the fund must send you an SAI.
• Read its annual and semi-annual reports to shareholders.
• Read investment books, investor magazines and newspapers. The fund companies themselves can also provide information.

Remember: There are no guarantees in mutual fund investing. Inform yourself and exercise your judgment carefully before you invest.

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