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Mutual Funds

Ready to invest in the stock and bond market? Feeling a little bit intimidated? Try a mutual fund.

If you've taken a good look at your financial goals and are ready to invest more effectively, evaluate the benefits of a mutual fund. Consider a mutual fund as a great market-based investment. You can find a mutual fund that meets virtually every investor's objective: from low to high risk, from growth to income, tax-exempt, international, real estate, and from conservative to aggressive.

Risk Category

Growth Rate


Low to high, depending upon investment objective

Varies, depending upon the fund, and may offer possibility for quick growth.

  • Funds can range from conservative to aggressive.
  • Consider "Load" vs. No-Load funds

What Exactly is a Mutual Fund?

A mutual fund is a shared investment that combines several investors' money to buy stocks or bonds. Each mutual fund you own is one slice of a large pie of the many stocks and bonds the fund holds. When you buy a mutual fund, you buy a share of all the stocks the fund owns. This means the mutual fund itself does the diversifying for you for much less of an investment than if you were buying each stock individually. Diversification means spreading your investment over a number of securities that minimize the risk of loss if one of your investments performs poorly. You become a stockholder without some of the complications of self-selecting individual stocks.

A mutual fund is managed, full-time, by skilled professionals who decide on the stocks to buy and sell every day. The Fund Manager's job is to maximize your return from your investment, while maintaining the appropriate risk level.

Should You Buy "Load" or "No-Load"?

Very simply, on a load mutual fund you pay a sales commission when you purchase it. A no-load mutual fund carries no up-front sales commission. Many people subscribe to the philosophy of buying into no-load funds; however, it's more important to evaluate a fund's total return, net of charges and fees, and your investment objectives. For example, short-term investments in no-load mutual funds may be a better decision since you will not pay the up-front fee. Be aware that no-load funds tend to charge higher management fees. Conversely, if you are establishing a long-term investment, the load mutual fund may carry a lower annual management fee, and you may end up with a better overall return from this strategy. For more information about mutual fund fees, see the U.S. Securities and Exchange Commission (SEC) article, Mutual Fund Fees and Expenses. Keep in mind that fund performance and your own financial strategy is probably a more accurate way of determining whether a load or no-load fund is best for you.

How Do You Choose Which Mutual Fund to Buy?

When looking at the vast array of mutual fund choices, you'll want to consider two important elements: 1) the rate of return, and 2) the level of risk. Some mutual funds are very aggressive, offering you a high potential rate of return, but also come with a price of higher risk. Other mutual funds are more conservative that tend to generate slower growth and lower rates of return. For a detailed description of mutual fund risk, see the Journal of Accountancy article, Understanding Risk in Mutual Fund Selection.

Should you decide to invest in a mutual fund, you'll be happy to know that your funds are liquid; meaning, it's simple to sell your shares if you need cash. Mutual funds can typically be sold during any business day at the current rate, less sales charges or redemption fees, if any. You should be aware that share prices will reflect the current market value, which may be more or less than what you originally paid when you bought the fund.

What Kind of Service Can I Expect?

Who can help advise you on where and how to invest? Services among mutual fund companies are varied. Larger, traditional companies and some of the big Internet investment companies offer a very wide range of funds, which make investing virtually hassle-free and hands-off for you, the consumer. Most mutual funds will automatically reinvest your dividends in additional shares and keep track of your transactions for tax purposes, free of charge.

Mutual funds are also very user friendly. Systems can often be set up for automatic investments, telephone withdrawals, and exchange programs that let you transfer money from one fund to another or one fund to a bank account. You can even get detailed online account statements, regular fund reports, and year-end tax information.

Getting Started

If you think a mutual fund is for you, a good place to start is with your local bank. They can refer you to a portfolio of funds they sponsor or can refer you to a larger, more specialized brokerage house. You may also want to talk to your employer or family and friends about the funds in which they invest and the companies they use. The Internet is also an excellent source for straightforward information on investing in mutual funds. Before you shop, read Washington State's consumer guide of handy Tips on Understanding Mutual Funds.

Some things to keep in mind while searching:

  • Determine your risk tolerance level and concentrate on mutual funds that fit your investment criteria
  • Read the prospectus - This is a legal disclosure document that explains all of the information about a fund, including the fund's investment objectives and strategies, the risk level and tax consequences, background on the fund manager, and the list of fees associated with the fund. Most importantly, the prospectus will summarize how well the fund has performed. For more information on understanding a mutual fund prospectus, see the SEC article, Mutual Fund Prospectus, Tips for Reading One.
  • You may want to have a look at the companies' financial reports in addition to the prospectus.
  • Identify add-on fees that may be assessed, such as management fees and exchange fees.
  • Take a look at "indexed funds." An indexed fund invests in the same stocks that make up a particular market index. The Standard & Poor's 500 Index is an example of a common index. The stocks held in an index fund will return the same as the average return of the index in the marketplace. Since there is very little research or analysis required with an index fund, the management fees are usually lower than other stock funds.

Mutual funds provide an alternative to direct stock purchase. They can offer you a number of benefits, including diversification, convenience, reasonable cost, and expert selection. You can find a mutual fund that will fit your risk level - from aggressive growth to highly conservative balanced funds. As with any investment choice, you'll want to evaluate carefully before making any decisions. There are thousands of mutual funds you may want to consider, and the help of a financial professional may be well worth the expense.

For more information on financial savings and investment matters, read the related articles in our Knowledge Center Library.

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