Investments may take many forms. Some people buy and sell stocks and bonds while others purchase real estate. Another common investment tool is a mutual fund.
By investing in a mutual fund, you’re essentially pooling your money with other investors to access a broader range of stocks or bonds than most people could own by themselves.
According to the Investment Company Institute, there are more than 7,581 mutual fund choices in the United States today controlling close to $11.8 trillion in assets as of the end of 2010. The investment company uses the assets in the fund to buy and sell securities such as stocks or bonds in pursuit of a specific objective as outlined by the company charter. The fund objectives and other important information are found in the prospectus.
Mutual fund objectives
One objective a mutual fund may attempt to achieve is long-term growth of capital. This may be done by purchasing the stock of large companies that have consistently made a profit, or buying the inexpensive stock of smaller companies in hopes that the value increases. Some funds may be invested primarily in foreign companies while others invest in specific market sectors such as technology or health care.
Some funds are developed to generate income for the investors. Dividends from bonds or preferred stocks held by these funds are accumulated and distributed to investors on a regular basis. If the fund’s assets are invested in municipal bonds, the dividends may be exempt from federal taxes, which would provide the investor with income taxed solely at the state or local level.
How a fund is managed
Many funds are actively managed, meaning an experienced investment advisor will take an active role in determining the portfolio, or holdings, of the fund. The securities held in a fund may change based on how well a security performs and meets the objective of the fund.
Other funds are called index funds and attempt to mirror the performance of a given index, such as the S&P 500® or the Russell 2000® Indexes. The fund portfolio will generally contain stocks of as many companies in the index as is possible in amounts reflecting the weighting assigned by the index.
To obtain detailed information on a fund, read the prospectus. It explains everything from the funds’ investment objective to the fee structure. Reading it is an important step to understanding the mutual funds that you may be considering.
Information provided by Eric Schepers, State Farm Insurance, 516 Nile Kinnick Drive S., Suite A, 993-3482.