Introduction to Mutual Funds Investing in Mutual Funds Other Important Facts about Mutual Funds

Picking the Right Fund for You
First, ask yourself how much you want to make & how much risk you can tolerate. When investing in mutual funds, investors should pick mutual funds based on their personal objectives and risk tolerance. Before making an investment, make sure that you have done some research and have enough understanding of the fund that you are buying. Investors can find information about a fund's goals, strategy, performance, management, and fee structure in its prospectus. When evaluating a fund, investors should compare its relative performance over various periods of time (for example, 1, 3, 5, and 10 years) and in different kinds of economic and stock market environments. A fund manager's experience and record, the fund's level of consistency, and its major investment holdings are other important factors to consider. Investors can also find information and rankings of mutual funds in various publications such as Forbes, Value Line, Barron's, Business Week, and Morningstar.

Other Important Facts about Mutual Funds

Important Terms
The followings are some common terms to know when investing in mutual funds:

Net Asset Value (NAV) - A fund's NAV value is calculated as the fund's assets minus its liabilities. The NAV per share is calculated by dividing the NAV by the number of fund shares outstanding

Open-End Versus Closed-End Funds - Mutual funds can be divided into two main categories: open-end funds and close-end funds. The former continuously issues new shares, accepting new funds for investment. In general, open-end funds redeem shares at the current net asset value (NAV). On the other hand, close-end funds raise capital by issuing a fixed number of shares. Their shares, like common stock, are traded on an exchange.

Different Types of Mutual Funds
Since all mutual funds have fund objectives, they focus on different products or investments. In general, mutual funds are divided into three groups according to their asset allocations: equity funds, fixed-income funds, and money market funds.

• Equity Funds - Equity funds are mutual funds that contain equity securities, mainly stock. The objectives of these funds are usually long-term growth with some income. However, performances of these funds vary since there are many types of equities.
  
• Fixed-Income Funds - The main objective of fixed-income funds is to generate steady cash flow for fund holders by investing in government or corporate debt, such as bonds. Fixed-income funds are a relatively safe investment since they promise to generate steady income flow. However, these funds are not without risk. A fund investing in junk bonds, which have high yields but also high default risk, is much more risky than other fixed-income funds.
  
• Money Market Funds - Money market funds invest in short-term debt products, such as Treasury Bills, CDs, and other short-term money market instruments. These funds bear very little risk and are therefore particularly suitable for conservative investors. The return of the money market funds is generally much more than what you would receive by putting money in a regular savings account and a little less than the return of a certificate of deposit (CD).

Of course, this is only a general classification of mutual funds. In fact, many funds possess a mixture of different types of securities (often referred to as "balanced funds") according to the funds objectives. As more investment products are invented, investors can expect to see more types and combinations of mutual funds in the future.