Mutual Funds

Since the early 1980's, the Mutual Fund industry has absolutely taken off.  Before then, investors wanting to invest outside of traditional banking products, usually turned to a full-service broker to make investment selections for them. The brokerage industry at the time was a very expensive investment choice. Mutual funds numbered about 400; as it stands now, there are over 8000 funds, and as of October, 2006, the mutual fund industry held a record $10 Trillion dollars of investor's money. Funds of every shape and size, there is a fund for most every type of investor.

Mutual Funds allow investors with limited funds, limited time and limited knowledge of investments to earn a market rate of return.

Defined:  A Mutual fund is an investment company that raises money by selling its own shares and then invests those proceeds in a variety of securities.  Many times, a mutual fund is described as a 'pooling arrangement' because many investors are 'pooling' their money to purchase marketable securities.


Diversification:   For as little as $500 an individual investor can buy into a portfolio of as many as 1000 different securities. Prior to mutual funds, an investor was faced with buying shares in individual firms; 100 shares in IBM at $165 per share, was an $16,500 investment. If you had the funds, you could buy IBM, and you would own one stock. A mutual fund with a minimum investment of $1000, you own a portion of a diversified portfolio.

Systematic Supervision:
Professional Management Those of us that do not have the time or expertise to manage our own portfolios can depend on the professional help of a money management team. The fund manager conducts the necessary research and makes investment choices for us.

Switching Privileges:
Especially with large fund companies, an investor may "switch" their assets between funds thereby taking advantage of market changes. Some fund families hold over 200 different funds. These companies have been very successful in drawing investors into their funds; with the large number of choices that we have, we can move investments quickly and easily out of one fund and into another.


OPEN END: The majority of mutual funds in the market are "open ended."  The fund continually sells new shares to the public, unlike a closed end fund (see below).

CLOSED END:  Funds have a fixed number of shares and trade on major exchanges like stock. The fund does not continually issue new shares as an open ended fund. A list of closed end funds regularly appears in the Wall Street Journal separate from the regularly listed Mutual Fund section.

LOAD:   A fund that has a "load" has a sales charge applied against an investment.  The "load" may be between 1%-8.5%. Front end loads are levied against incoming deposits or investments. A 3% front end load, for example, would charge $30 on a $1000 investment when the investment is being made ($970 would be invested). A Back End load would levy the sales charge against funds that are being withdrawn from the fund.

Loaded funds are just as popular as no-load funds.  Of the numerous studies done on the performance of the two, there is little correlation that load funds (because they have a sales charge) would outperform a no-load fund.  As an investor, make a mutual fund selection from the fund type and investment objective that fits your own investment style and risk level, not strictly on the basis of load.

NO-LOAD:   A fund that is no-load has no sales charge.  Money invested is deposited directly into the fund.

Features that you can expect from your mutual fund provider:
 - Automatic Reinvestment of earnings.
 - Income checks sent home.
 - Information Services, toll free numbers.24-hour service.
 - Websites filled with information, quotes on securities, prospectus' etc


DOLLAR COST AVERAGING The systematic purchase of mutual fund shares regardless of the share price.  Dollar cost averaging is the concept frequently quoted when investment professionals discuss the benefits of long-term mutual fund investing.  Investors are encouraged to make periodic investments into a mutual fund and not try to "time" the market.  History has so far proven that investors were well rewarded for not "trading" their investments.  To implement dollar-cost-averaging, an investor would simply create an annuity for themselves by sending the investment company an amount out of each paycheck.  That amount would be invested when the funds arrived at the investment company.  Investments in a 401(k) plan are dollar-cost-averaging.  Each pay-period, a pre-determined amount is invested into a fund of the employee's choosing.

SECTOR FUNDS Invest in a particular sector or industry.   An example of a Sector fund is the Fidelity Computer Fund, the Brokerage fund or the Japan fund.  Each of these specialize in companies within those industries or, in the case of the Japan fund, a particular geographical area.  The fund continues to offer a diversified portfolio to the investor, but it is more narrowly focused than a general stock fund that may have investments across several industries.

MONEY MARKET FUNDS This is just like a money market account at a bank, it is where idle cash can be held between investments.  The money earns interest similar to a bank savings account.

INDEX FUNDS The Standard & Poors (S&P) 500 is the most widely quoted Index in the world and represents a diversified list of 500 companies.  The index is not managed, S&P chooses the companies that are used to fill the index, companies that best represent the market and different industries.  Mutual fund managers that manage stock portfolios are most times graded against the "general market," the S&P 500.

After studies on the S&P 500 revealed that it's performance was beating the vast number of professional money managers, mutual fund companies began offering an Index Fund that mimicked the famous index.  S&P 500 Index funds are some of the largest funds in the world and they consistently outperform about 70% of all stock funds.  The investment company simply buys stocks of the 500 companies that constitute the index.  When S&P replaces one company with another, the fund follows the move, selling one company from the fund and buying the stock of the company that is being added to the index.
For more information of different indexes, click here.

PROSPECTUS Part of the Investment Company Act of 1940 is the requirement that investors be supplied with a Prospectus of the Mutual Fund at time of investment.  The Prospectus contains information about the fund that the Securities & Exchange Commission deems essential for the investing public.  The Prospectus is the place where the fund company discloses all of the particulars of the fund.  For example, if the fund is a load or no-load, if it is an open-end fund or closed-end, what kind of stock or bonds that it may invest in and in what quantities, etc.  A fund may have a restriction that it may only invest 5% of its money in a particular company, that it may only have a certain percentage of cash on hand, that it can only hold a certain percentage of bonds in the portfolio or if it can hold bonds at all.  The Prospectus is the single document that the investment company will insist that you read before sending them money.  Investment companies and brokers have gotten into big trouble in years' past for not sharing this document with investors or potential investors.

Fund NAV (very important)
Look in the Wall Street Journal's Mutual Fund section.  There you will see the Investment Company name in bold, followed by the individual funds that the investment company offers to investors.  A typical, daily Wall Street Journal Mutual Fund section is good for watching investment that you already own.  There is not enough information on a daily basis to select a fund from these listings for initial investment purpose.  The investment objective, fund performance or Load/No-Load indication are not shown.  The month-end and quarter-end mutual fund tables in the Journal contain all of that information including expanded tables on the fund's performance over extended periods of time.

What is shown daily, is the Net Asset Value of the fund, or NAV.  There is a simple and not simple explanation of what the NAV is:  Using the simple explanation it is the price-per-share of the fund.  Looking at the Journal, pick out an NAV.  Let's say for example the number is 30.  This  means that fund's closing price-per-share for the day is $30.  If you sent a check for $3000 to that fund to invest, and your check was invested that day, you would have bought 100 shares of that fund.  Simple.  After your purchase you may be naturally curious how your fund is doing over time and by checking the NAV in future information sources.
The more difficult but necessary explanation of the NAV:  It is the assets of the fund, minus the liabilities, (which equals net worth), divided by the number of shares outstanding.  The fund's price is set by this calculation each and every day and it represents the per-share value of the fund.  In an example, say the fund has $100,000,000 in assets and $10,000,000 in liabilities with 3,000,000 shares outstanding.  The NAV would be:  ($100,000,000 - $10,000,000) / 3,000,000 = $30 per share.


Selecting the right fund type and objective is the first step in mutual fund investing.  The Objective of the fund dictates its risk propensity as well as defines the investments that the fund manager MUST invest in.

An all-stock fund, for example, CANNOT purchase bonds even if the bond market is outperforming the stock market.  The PROSPECTUS is the document that outlines the type of fund, the objective of the fund and the permissible investments of that fund.
We as investors must be mindful of the ever changing investment climate to SWITCH from one fund to another to enhance our return as industries or sectors fall in and out of favor.


  1. Aggressive Growth Fund:
    1. Seeks maximum capital gains, not current income.  May invest in new companies, or troubled firms.  Use derivative securities to boost returns.
  2. Balanced:
    1. Aim to conserve principal, generate current income, and provide long-term growth.  Have portfolio mix of bonds, preferred stocks, and common stocks.
  3. Corporate Bond:
    1. Seek high level of income. Buy corporate bonds, some US Treasury bonds or bonds issued by federal agencies.
  4. Flexible Portfolio
    1. May be 100% invested in stocks, bonds or money market instruments. Have the greatest portfolio flexibility of all funds.
  5. Ginnie Mae (GNMA)
    1. Invest in mortgage backed securities. Must keep majority of portfolio in these securities.
  6. Global Bond
    1. Invest in debt of companies throughout the world.
  7. Global Equity
    1. Invest in stocks of companies throughout the world.
  8. Growth
    1. Invest in common stocks of well-established companies. Capital gains is primary objective.
  9. Growth & Income
    1. Invest in common stock of dividend-paying companies. Combine long-term capital gains and steady stream of income.
  10. High-Yield Bond
    1. Keep two-thirds of portfolio in lower-rated corporate bonds to achieve higher income.
  11. Income Bond
    1. Invest in corporate and government bonds for income.
  12. Income Equity
    1. Invest in companies with good dividend paying records.
  13. Income
    1. Mixed Seek high current income by investing in equities and debt instruments.
  14. Index
    1. Buy stock to match an index such as the S&P 500.
  15. International
    1. Invests in equity (stock) securities located outside the US.
  16. Long-Term Municipal Bonds
    1. Invest in bonds issued by states and municipalities.
  17. Money Market
    1. Invest in short-term securities sold in the money market.
  18. Option/Income
    1. Seek high current return by investing in dividend-paying stocks on which call options are traded.
  19. Precious Metals
    1. (Gold) Keep two-thirds of portfolio in securities associated with gold, silver, platinum and other precious metals.
  20. Sector
    1. Concentrate holdings in a single industry or country.
  21. Short-Term Municipal Bonds
    1. Invest in municipals with short maturities.
  22. Single-State Municipal Bonds
    1. Portfolios contain issues of only one State for income tax reasons.
  23. Socially Conscious
    1. Avoid investments in corporations that are known to pollute, involved in tobacco, liquor, etc.
  24. US Government Income
    1. Invest in a variety of government securities, including US Treasury and agency issues.

Typical academic credentials to be a fund manager would be a college degree, most have advanced degrees (MBA or Masters in Finance), Pass the Series 7 exam which will make you a broker, and the hardest credential to obtain is the Chartered Financial Analyst (CFA) designation.  It takes three years to become a CFA, tests are once annually and are very rigorous.  The CFA to the investment community is like a CPA license is to accountants.

Wall Street Journal Mutual Fund Page 1 of 2
Wall Street Journal Mutual Fund Page 2 of 2