Fund Advantages and

Disadvantages
This section covers mutual fund education designed to help beginners and
professionals alike. There are many aspects of mutual funds an investor should
understand before a mutual fund purchase is made.

The information below discusses the advantages and disadvantages of mutual fund
investing. The advantages include but are not limited to: diversification, professional
management, convenience, and liquidity. Disadvantages include but are not limited
to: risks and costs.

Advantages
Mutual Fund Education What are the key advantages of mutual fund
investing?
Why Mutual Funds?
Diversification
What is a Mutual Fund?
Using mutual funds can help an investor diversify
How Mutual Funds Work their portfolio with a minimum investment. When
investing in a single fund, an investor is actually
Mutual Fund Risk investing in numerous securities. Spreading your
investment across a range of securities can help to
Advantages/Disadvantages reduce risk. A stock mutual fund, for example,
invests in many stocks - hundreds or even
Mutual Fund Expenses thousands. This minimizes the risk attributed to a
concentrated position. If a few securities in the
Costs you Wont Find in a mutual fund lose value or become worthless, the
Prospectus loss maybe offset by other securities that
appreciate in value. Further diversification can be
Mutual Fund Categories achieved by investing in multiple funds which
invest in different sectors or categories. This
Fund Management Styles helps to reduce the risk associated with a specific
industry or category. Diversification may help to
How an Investment in a reduce risk but will never completely eliminate it.
Mutual Fund Makes Money It is possible to lose all or part of your
investment. Click here to see an example on
Investment Company Act of constructing a diversified portfolio.
1940
Professional Management:
Where to Purchase Funds
Mutual funds are managed and supervised by
Future Value Chart investment professionals. As per the stated
objectives set forth in the prospectus, along with
prevailing market conditions and other factors, the
mutual fund manager will decide when to buy or
sell securities. This eliminates the investor of the
difficult task of trying to time the market.
Furthermore, mutual funds can eliminate the cost
an investor would incur when proper due
diligence is given to researching securities. This
cost of managing numerous securities is dispersed
among all the investors according to the amount
of shares they own with a fraction of each dollar
invested used to cover the expenses of the fund.
What does this mean? Fund managers have more
money to research more securities more in depth
than the average investor.

Convenience:

With most mutual funds, buying and selling

shares, changing distribution options, and
obtaining information can be accomplished
conveniently by telephone, by mail, or online.

Although a fund's shareholder is relieved of the

day-to-day tasks involved in researching, buying,
and selling securities, an investor will still need to
evaluate a mutual fund based on investment goals
and risk tolerance before making a purchase
decision. Investors should always read the
prospectus carefully before investing in any
mutual fund.

Liquidity:

Mutual fund shares are liquid and orders to buy or

sell are placed during market hours. However,
orders are not executed until the close of business
when the NAV (Net Average Value) of the fund
can be determined. Fees or commissions may or
may not be applicable. Fees and commissions are
determined by the specific fund and the institution
that executes the order.

Minimum Initial Investment:

Most funds have a minimum initial purchase of

$2,500 but some are as low as $1,000. If you
purchase a mutual fund in an IRA, the minimum
initial purchase requirement tends to be lower.
You can buy some funds for as little as $50 per
month if you agree to dollar-cost average, or
invest a certain dollar amount each month or
quarter.

Disadvantages

Risks and Costs:

Changing market conditions can create

fluctuations in the value of a mutual fund
investment.

There are fees and expenses associated with

investing in mutual funds that do not usually
occur when purchasing individual securities
directly.

As with any type of investment, there are

drawbacks associated with mutual funds.

• No Guarantees. The value of your

mutual fund investment, unlike a bank
deposit, could fall and be worth less than
the principle initially invested. And, while
a money market fund seeks a stable share
price, its yield fluctuates, unlike a
certificate of deposit. In addition, mutual
funds are not insured or guaranteed by an
agency of the U.S. government. Bond
funds, unlike purchasing a bond directly,
will not re-pay the principle at a set point
in time.
• The Diversification "Penalty."
Diversification can help to reduce your
risk of loss from holding a single security,
but it limits your potential for a "home
run" if a single security increases
dramatically in value. Remember, too, that
diversification does not protect you from
an overall decline in the market.
• Costs. In some cases, the efficiencies of
fund ownership are offset by a
combination of sales commissions, 12b-1
fees, redemption fees, and operating
expenses. If the fund is purchased in a
 taxable account, taxes may have to be paid
on capital gains. Keep track of the cost
basis of your initial purchase and new
shares that are acquired by reinvesting
distributions. It's important to compare
the costs of funds you are considering.
Always look at "net" returns when
comparing fund performances. Net
return is the bottom line; an
investment's true return after all costs
are deducted.

Prospectuses will not contain all the costs that

affect the net return on your investment. This is
why it is important to compare net returns
whether or not the fund in a no-load or load
fund.

Continue

Welcome to the Mutual Funds

Resource Center

Types of mutual funds

Most funds have a particular strategy they focus on when
investing. For instance, some invest only in Blue Chip
companies that are more established and are relatively low
risk. On the other hand, some focus on high-risk start up
companies that have the potential for double and triple digit
growth. Finding a mutual fund that fits your investment
criteria and style is important.

Types of mutual funds are:

Value stocks
Stocks from firms with relative low Price to Earning
(P/E) Ratio, usually pay good dividends. The
investor is looking for income rather than capital
gains.
Growth stock
Stocks from firms with higher low Price to Earning
(P/E) Ratio, usually pay small dividends. The
investor is looking for capital gains rather than
income.
Based on company size, large, mid, and small cap
Stocks from firms with various asset levels such as
 over $2 Billion for large; in between $2 and $1
Billion for mid and below $1 Billion for small.
Income stock
The investor is looking for income which usually
come from dividends or interest. These stocks are
from firms which pay relative high dividends. This
fund may include bonds which pay high dividends.
This fund is much like the value stock fund, but
accepts a little more risk and is not limited to
stocks.
Index funds
The securities in this fund are the same as in an
Index fund such as the Dow Jones Average or
Standard and Poor's. The number and ratios or
securities are maintained by the fund manager to
mimic the Index fund it is following.
Enhanced index
This is an index fund which has been modified by
either adding value or reducing volatility through
selective stock-picking.
Stock market sector
The securities in this fund are chosen from a
particular marked sector such as Aerospace, retail,
utilities, etc.
Defensive stock
The securities in this fund are chosen from a stock
which usually is not impacted by economic down
turns.
International
Stocks from international firms.
Real estate
Stocks from firms involved in real estate such as
builder, supplier, architects and engineers, financial
lenders, etc.
Socially responsible
This fund would invests according to non-economic
guidelines. Funds may make investments based on
such issues as environmental responsibility, human
rights, or religious views. For example, socially
responsible funds may take a proactive stance by
selectively investing in environmentally-friendly
companies or firms with good employee relations.
Therefore the fund would avoid securities from
firms who profit from alcohol, tobacco, gambling,
pornography etc.
Balanced funds
The investor may wish to balance his risk between
various sectors such as asset size, income or
growth. Therefore the fund is a balance between
various attributes desired.
Tax efficient
Aims to minimize tax bills, such as keeping turnover
levels low or shying away from companies that
provide dividends, which are regular payouts in
 cash or stock that are taxable in the year that they
are received. These funds still shoot for solid
returns; they just want less of them showing up on
the tax returns.
Convertible
Bonds or Preferred stock which may be converted
into common stock.
Junk bond
Bonds which pay higher that market interest, but
carry higher risk for failure and are rated below
AAA.
Mutual funds of mutual funds
This funds that specializes in buying shares in other
mutual funds rather than individual securities.
Closed end
This fund has a fixed number of shares. The value
of the shares fluctuates with the market, but fund
manager has less influence because the price of
the underlining owned securities has greater
influence.
Exchange traded funds (ETFs)
Baskets of securities (stocks or bonds) that track
highly recognized indexes. Similar to mutual funds,
except that they trade the same way that a stock
trades, on a stock exchange.

Welcome to the Mutual Funds

• Mutual fund expenses
Resource Center • Load vs. no-load funds
• Mutual fund fees
Mutual fund expenses
• Distribution of capital gains
There are many expenses
and dividends

• Mutual fund taxation

• Mutual fund expenses

• Load vs. no-load funds
Mutual fund expenses
• Mutual fund fees
There are many expenses associated with mutual funds. Explore
this section to learn more. • Distribution of capital gains
and dividends

• Mutual fund taxation

 History of Mutual Funds
Mutual funds are not an American invention. The first was started in the Netherlands in
1822, and the second in Scotland in the 1880's.

Originally called investment trusts, the first American one was the New York Stock Trust,
established in 1889. Most that followed were begun in Boston in the early 1920's, including
the State Street Fund, Massachusetts Investor's Trust (now called MFS), Fidelity, Scudder,
Pioneer, and the Putnam Fund.

In the 1960's there was a phenomenal rise in aggressive growth funds (with very high
risk). Sometimes called "go-go" funds, they received the majority of the billions of dollars
flowing into mutual funds at that time. In 1968 and 1969, over 100 of these new
aggressive growth funds were established, bragging about how heavily invested they were
in the new technology stocks.

A severe bear market began in the fall of 1969. People became disillusioned with mutual
funds and the stock market. "The market's toast. it'll never get back to where it
was!" was echoed by panicked investors.

Unemployment grew, inflation went crazy, and investors pulled billions back out of the
funds. They should have hung in there! Even the author of this book made the mistake of
cashing in his mutual fund shares. The fund he jumped ship on has risen 9,000% since
then.

At the end of the 1920's there were only 10 mutual funds. At

the end of the 1960's there were 244, and 413 in 1980. Today
there are more than 6,500 unique funds and even thousands
more that differ only by their share class (how they are sold,
and how their expenses are charged).

The 1970's saw a new kind of fund innovation: funds with no sales commission called "no
load" funds. The largest and most successful no-load family of funds is the Vanguard
Funds.

Before we continue with all you need to know about mutual funds, here is something that
merits your attention. Since 1940, no mutual fund has gone bankrupt. You sure
can't say that about banks or savings and loans!

You may be wondering that with thousands of mutual funds and many, many types, how
does one intelligently select the best one? Well, we're going to explore the various kinds
and some of their good points and bad points.

Keep in mind that before you invest, you need to know what a fund buys, what the
manager's philosophy is, and what gives you confidence that this is a good fund to own. If
you can't answer these questions in just a couple of sentences and in a way that your
grandmother can understand, then maybe the fund isn't for you.

Choosing a fund isn't complicated unless you want to make it so. I am going to show you
your options, but if you want a no-brainer that will definitely work, just put every extra
dime into the Vanguard S&P 500 Index Fund. Keep throwing your money at it month after
month and you will outperform at least 80% of the professional money managers. The
reason that we don't end the chapter right here with this advice is that by educating
yourself with additional information, you can do even better.
Other Stock Market Basics Topics:

1. Mutual Fund Advantages

2. History of Mutual Funds
3. NAV
4. Dollar Cost Averaging
5. General advice about choosing a fund
6. Mutual Fund Ratings
7. Evaluating Mutual Fund Investment Risk
8. Mutual Fund Share Classes
9. Mutual Fund Fees
10. The Mutual Fund Prospectus
11. How important is the manager's length of experience?
12. Why is the prospectus hard to understand?
13. Mutual Fund Annual Report
14. Comparing your fund to the competition
15. Comparing funds on an after-tax basis
16. Average Return on Investment
17. How Not to Pick a Mutual Fund
18. Cashing in Your Fund
19. When to Sell Your Fund
20. Mutual Funds and Asset Allocation
21. When to get started with a mutual fund
22. Types of Mutual Funds
23. Value Stock Funds
24. Growth Stock Funds
25. Small and Micro-cap Stocks
26. Mid Cap
27. Large Cap Companies
28. Income Stock Funds
29. Mutual Fund Index
30. Enhanced Index Funds
31. Sector Mutual Funds
32. Stock Market Sectors
33. Defensive Stocks
34. International Funds
35. Real Estate Mutual Funds
36. Socially Responsible Funds
37. Balanced Funds
38. Tax-Efficient Funds
39. Bond Convertible Funds
40. Junk Bond Funds
41. Mixtures of stock types
42. Closed End Funds
43. Exchange Traded Funds (ETF’s)
44. Stock Picking Strategy - Picking your own stocks?
45. Fund names, and what they really invest in
46. How to get started
 47. Where can I start investing with no money?

Mutual fund fees • Mutual fund expenses

In order to cover their expenses mutual funds charge fees to the
• Load vs. no-load funds
investors. Although these fees are only a few percentage points
• Mutual fund fees
a year and seem like a minor expense, they create a serious
drain on the performance over a period of years. • Distribution of capital gains
and dividends
Some fees to consider are:
• Mutual fund taxation
Redemption fees
A mutual fund may charge fees when the investor sells shares back to the mutual fund.
Contingent deferred sales charge
A mutual fund may charge sales charges that are reduced at certain time intervals. For
example, the fund may charge 6% of the sale price the first year after the shares are bought.
Each year thereafter the fee would be reduced by 1% until no fee would be charged. This is an
incentive for investors to leave their money in the fund.
Management fees
Mutual funds may charge fees to cover expenses such as advertising, brokers' costs and toll-
free telephone lines. These are 12b-1 fees, regulated by law.
Transfer fees
A fee is charged each time the investor transfers money within the company.

Load vs. no-load funds

Load funds are mutual funds that have sales charges. When
an investor purchases shares of a mutual fund the investor • Mutual fund expenses
pays a fee for the sale (transaction) of the shares. Sales
• Load vs. no-load funds
charges are required by law to be no more than 8.5% of the
• Mutual fund fees
price of the shares bought. A load fund is where the broker
receives all his commission with the first funds received from • Distribution of capital gains
the investor. Therefore the investor must pay the brokers and dividends
commission completely before any of his funds go toward the
purchase of shares. • Mutual fund taxation

No-load funds do not charge an upfront fee for the sale transaction. In a no-load fund the broker
receives his commission as he receives the investor's funds and shares are purchased with the
investor's initial funds.
 Mutual fund taxation
The mutual fund manager must send the investor a tax • Mutual fund expenses
information statement so the investor can declare taxes. The • Load vs. no-load funds
investor must account for all capital gains or loses and dividends • Mutual fund fees
even if the dividends and capital gains are reinvested into the • Distribution of capital gains
mutual fund. When mutual funds shares are sold/redeemed the and dividends
mutual fund manager should aid the investor in determining the
purchase bases for the shares sold/redeemed. Recent federal • Mutual fund taxation
tax codes have modified the treatment of dividends and capital
gains depending on the investor's income level and tax bracket

Advantages of mutual funds

Mutual funds provide professional management and research to • Mutual funds vs. other
select quality securities. They spread the risk over a larger investments
quantity of stock than the investor usually has funds to buy. In a • Advantages of mutual
mutual fund the investor can add funds to his/her investments at funds
set amounts and smaller quantities such as $100 per month.
The investor can access the advantage of the stock market • Disadvantages of mutual
which overall has out performed other investments in long term funds
investments. The mutual fund managers are able to buy
securities in large quantities thus reducing brokerage fees.

Advantages of mutual funds

Mutual funds provide professional management and research to • Mutual funds vs. other
select quality securities. They spread the risk over a larger investments
quantity of stock than the investor usually has funds to buy. In a • Advantages of mutual
mutual fund the investor can add funds to his/her investments at funds
set amounts and smaller quantities such as $100 per month.
The investor can access the advantage of the stock market • Disadvantages of mutual
which overall has out performed other investments in long term funds
investments. The mutual fund managers are able to buy
securities in large quantities thus reducing brokerage fees.

• Mutual funds vs. other

Disadvantages of mutual funds investments
Fund management fees may be unreasonable for the services • Advantages of mutual
rendered. The investor must rely on the integrity of the funds

• Disadvantages of mutual
funds
professional fund manager. In some cases the fund manager may not pass on transaction savings to
the investor. The fund managers are not liable for fund losses due to poor judgment on their part. The
fund managers may make so many transactions in the fund that high fee/cost result and are passed on
to the investor. Prospectuses and Annual reports are hard to understand. Restrictions on when and how
an investor sells/redeems his mutual fund shares. The investor may feel a loss of control of his
investment dollars.

Dangers of mutual funds • Dangers of mutual funds

There are many dangers associated with mutual funds. Explore • What to look out for
this section to learn more.
• Recent scandals

Dangers of mutual funds • Dangers of mutual funds

There are many dangers associated with mutual funds. Explore • What to look out for
this section to learn more.
• Recent scandals

What to look out for • Dangers of mutual funds

Repeating some of the concerns expressed in the mutual fund • What to look out for
disadvantages.
• Recent scandals
• Performance below other mutual funds in the same
sector or against a recognized index.
• There may be too many transactions in the fund resulting in higher fee/cost to the investor -
This is sometimes call "Churn and Earn".
• Prospectus, Annual report and Statement of Additional Information are hard to understand.
• There are restrictions on when and how an investor sells/redeems his mutual fund shares.

Recent scandals
Unfortunately there have been incidences in which mutual fund
• Dangers of mutual funds
managers have traded stocks at prices other than reported to
• What to look out for
the investor. An example is the use of closing share price for
reported trades for the day the investor request an execution of
• Recent scandals
his shares. Whereas the mutual fund manager may have received a more advantageous share price
before the closing share price is set. The mutual fund manager retains the additional gain for himself or
his firm. Since there are usually large volume trades the gain may be substantial even with a fraction of
a share price.