| In turbulent times like we are seeing today, it is nice | | | | focus only on short-term, high-quality investments |
| to have an investment vehicle like mutual funds to | | | | issues by state, local and federal governments. |
| help investors manage risk. A mutual fund is a | | | | You can earn money from your mutual fund |
| company that pools money from many investors and | | | | investment in three ways: |
| invests the money in stocks, bonds, short-term | | | | |
| money-market instruments, other securities or | | | | 1. Dividend Payments - A fund may earn income in |
| assets, or some combination of these investments. | | | | the form of dividends and interest on the securities in |
| The combined holdings the mutual fund owns are | | | | its portfolio. The fund then pays its shareholders |
| known as its portfolio. Each share represents an | | | | nearly all of the income (minus disclosed expenses) it |
| investor's proportionate ownership of the fund's | | | | has earned in the form of dividends. |
| holdings and the income those holdings generate. | | | | 2. Capital Gains Distributions - The price of the |
| Buying mutual funds has many advantages to the | | | | securities a fund owns may increase. When a fund |
| average investor. First, it is easier to build a diversified | | | | sells a security that has increased in price, the fund |
| portfolio through mutual funds than it is to buy | | | | has a capital gain. At the end of the year, most |
| individual stocks to do the same. You also benefit | | | | funds distribute these capital gains (minus any capital |
| from the professional management of the fund. That | | | | losses) to investors. |
| said, it is critically important to understand what you | | | | 3. Increased NAV- If the market value of a fund's |
| are buying and who is managing the fund. Fortunately | | | | portfolio increases after deduction of expenses and |
| there are many resources to help. Here in Charleston, | | | | liabilities, then the value (NAV) of the fund and its |
| SC we even have a radio program, The Mutual Fund | | | | shares increases. The higher NAV reflects the higher |
| Show, on 94.3 FM that helps make sense of mutual | | | | value of your investment. |
| funds. | | | | With respect to dividend payments and capital gains |
| Mutual funds are run by professional managers | | | | distributions, funds usually will give you a choice: the |
| identify stocks, research their risks and prospects, | | | | fund can send you a check or other form of |
| and monitor their performance. To do that on a | | | | payment, or you can have your dividends or |
| portfolio of 10 or more stocks would likely prove to | | | | distributions reinvested in the fund to buy more |
| be time prohibitive for the average investor. Mutual | | | | shares (often without paying an additional sales load). |
| funds are quite liquid and provide a low cost of entry | | | | There are many factors to consider in purchasing a |
| in building a diversified portfolio. | | | | fund such as cost, risk, and tax treatment. Research |
| Funds often specialize in a certain kind of investment. | | | | your choices carefully, review the fund prospectus |
| Some focus on certain types of stocks such as | | | | and even talk to your advisor before making a fund |
| growth or large capitalization stocks. Other focus on | | | | purchase. |
| bonds and yet another group called money markets | | | | |