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Mutual fund basics

Posted March 05, 2014 in Advice Column, Ames

A mutual fund pools the money of many investors to purchase securities. My members and I deal with them a lot in my role as a financial associate with Thrivent Financial. The below information from Broadridge Investor Communications Solutions Inc. lays out some of the basics of investing in mutual funds, how they’re used and what they can and can’t do for you.

Types of mutual funds
The two most common types are stock mutual funds and bond mutual funds. A stock fund invests in common stocks issued by U.S. and/or international companies. Funds are often named and classified according to investment style or objective, which can be stated in various ways. The fund prospectus is like an owner’s manual and contains information about the kind of investment style that the manager(s) employ and the kinds of stocks that the fund will buy. Before investing in any mutual fund, carefully consider its investment objectives, risks, fees and expenses, which are discussed in the prospectus available from the fund. Read the prospectus carefully before investing.

A bond fund is made up of debt instruments that governments or corporations issue to raise capital. They are designed to provide investors with interest income in the form of regularly scheduled dividends. If you bought individual bonds, you would need to concern yourself with their maturity dates and the reinvestment of your funds. Buying shares of a bond fund relieves you of these concerns; the fund manager handles them for you.

What are the benefits of investing in a mutual fund?
• Diversification: Most mutual funds own dozens or even hundreds of securities. This exposes you to less potential risk than buying just a few individual securities. If some of the fund’s holdings perform poorly, they may be offset by others doing well (though diversification cannot guarantee a profit or eliminate risk).
• Professional money management: When you buy shares in an actively managed mutual fund, part of what you pay for is the fund manager’s expertise.
• Liquidity: You can convert your mutual fund investment into cash (i.e., redeem your shares) by making a request to the fund company in writing, over the phone, or on the Internet on any business day.

Of course, mutual funds are not guaranteed investments. The price of all mutual fund shares can change daily, and you’ll receive the current value of your shares when you sell — which may be more or less than you paid. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investing strategy will be successful.

Information provided by Duane Faas and Kirt Till, Thrivent Financial, 315 Sixth St., Ames, 515-292-7077.

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