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| What is a Mutual Fund? |
| A mutual fund is an investment vehicle that pools your money with the money of many other people who have similar investment goals. Professional money managers use this pool of money to buy securities that, in their judgment, will help achieve your specific financial objectives. Mutual funds may be an appropriate retirement investment choice because they offer both professional management and diversification. Mutual funds are not FDIC-insured. The value and growth of your mutual fund may fluctuate with market conditions. |
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| Why should I consider investing in mutual funds? |
| Mutual funds offer a quick, efficient, and cost-effective means of managing money. They provide professional management, ongoing supervision of your holdings, and automatic diversification-all important elements of a well-rounded investment program. Because shares can be redeemed on any business day at the then current net asset value (less any applicable redemption changes), mutual funds provide easy liquidity; and because shares of a mutual fund are priced daily, you always know what your investment is worth. Investment return and principal value will vary with market conditions and an investor's shares, when redeemed, may be worth more or less than their original purchase price. |
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| What is a prospectus? |
It is an SEC mandated document that open-end funds (that is, mutual funds), or newly issued closed-end funds, are required to provide to investors. Investors should read it carefully before investing or sending money. A prospectus contains descriptions of :
- Fees, in a standardized format
- Investment objective
- Some financial data
- Investment methods, risk description
- Investment manager and compensation
- How to buy shares
- How to sell shares, including signature guarantee requirements
- Dividend and capital gain distributions
- Other services
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| What is NAV? |
NAV stands for Net Asset Value. The NAV of a mutual fund is determined by dividing the net assets of the portfolio by the number of outstanding units on the valuation date.
Typically, NAV is calculated by summing the current market values of all securities held by the fund, adding in cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding. Most funds compute NAVs daily based on closing market prices. |
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| How can I judge a Mutual Fund's performance? |
| The financial press frequently carries articles about mutual funds, often comparing and rating the performance of similar funds. When reading such articles, it is wise to look at the funds' long-term records rather than focus on strong, yet sometimes transitory, current performance. When evaluating a fund's performance on your own, the most important thing to remember is to compare apples with apples. For example, don't measure a bond fund's results against the rise and fall of the stock market. Even when comparing funds in the same category, you should use the appropriate market index or some other benchmark. A broad-based stock fund, for example, can be compared against the Standard and Poor's 500 Index, while a small company stock fund is better judged against the Russell 2000 Index. Remember that funds for your portfolio are best chosen with the help of an investment professional, and that past performance is no guarantee of future results. |
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| How can I tell whether my fund is performing well? |
The most important criterion for judging a fund's performance is how well its results mesh with your needs and objectives. Beyond that, the most relevant measurement of a fund's performance is its ranking within its peer group, when compared against funds with similar objectives. Your investment professional can help you compare the performance of various funds and explain the relationship between performance and risk.
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| What dates are important when investing in mutual funds? |
There are several important distribution related dates to be aware of when buying and selling mutual fund shares:
- Declaration date: This is the date on which the distribution is declared.
- Ex-dividend date: This is the date the shares trade without the dividend.
- Record date: Shareholders who own shares on this date will receive the distribution.
- Payment date: This is the date on which the dividend is actually paid out.
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| What are the tax implications of mutual funds for individuals? |
| Like shares of any stock, selling mutual fund shares may cause you to realize a capital gain or loss. Mutual funds also distribute dividends received and their own realized capital gains, usually at the end of the year. These distributions, whether taken in cash or reinvested, are taxable (note that the non-taxability of municipal bond funds' distributions applies only to dividend distributions; capital gain distributions are always taxable). For tax purposes, reinvesting dividends or capital gains is considered identical to taking the distribution in cash and sending the same amount into the fund as a new investment. When selling, it is best to know the different methods of calculating the cost basis of shares sold ahead of time, since some methods require that you designate which shares are to be sold. Please consult your tax or financial advisor for more information. |
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| If a fund offers class A, B, C, etc. shares, which one should I buy? |
Many funds that have sales charges offer investors a choice as to how the sales charges (load) will be paid. The different share classes reflect these various options, and generally the choices run somewhat like this:
(i) Class A shares have a front-end load, that is, a sales commission on the money invested that is charged when the money is invested, and often have an annual charge against your fund's value, a so-called 12b-1 fee, generally around .25% per year.
(ii) Class B shares have a back-end load, that is, a sales charge levied on the fund shares when they are sold, which usually decreases over time and eventually disappears. Class B shares usually have a higher 12b-1 fee, typically 1% per year, but convert to the lower cost Class A shares after a period specified in the prospectus;
(iii) Class C shares might have no front-end or back-end load, but instead contain an annual charge against your fund's value, a so-called 12b-1 fee, which, for long term investors may make these shares the most expensive to own, since, unlike Class B shares, they do not convert to a lower fee class of shares. Other combinations of varying levels of these three loads may also be offered as an investment option. The sales charges on mutual fund shares (and typically the ongoing 12b-1 fees) are paid to the broker/dealer firm or other financial institution through which you purchase your shares, and a portion of the charge is paid by such firms to the financial professional assisting you with purchasing the shares.
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| Should I be concerned with fund expenses? |
Yes. Fund expenses include the fund's management fee and other expenses and should be evaluated when you decide to invest in a particular fund, since the fees tend to reduce the performance of the fund, and, over time, higher fees may result in lower performance relative to other similar funds with lower fees. Your investment professional can help you determine whether a particular fund's expenses are high or low relative to the particular category of fund you are interested in.
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| Why are there different classes of Mutual Funds? |
| A growing number of mutual fund companies offer investors a choice in the way the sales charge and other fees are structured. Your financial advisor can help you determine the most favorable arrangement for your situation. |
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| How can I learn more about fund performance? |
| You can check mutual fund performance information in the mutual fund listings in The Wall Street Journal, The New York Times, or your local newspaper. Fund information is typically listed alphabetically under the name of the specific mutual fund company. |
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| What are dividend distributions? |
A mutual fund may receive dividend or interest income from the securities it owns and is required to pay out this income to its investors. Most mutual funds offer an option to purchase additional shares with the distributions. Dividend distributions on fixed income funds are often made monthly or quarterly, although many equity funds make distributions only yearly.
A dividend distribution lowers the net asset value of the fund by the amount of the distribution. The shareholder does not actually lose money because of the distribution, since he or she gets cash or additional shares to compensate for the lower net asset value. Distributions have important tax consequences. Investors should consult their tax advisor for more details.
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| What are "capital gain distributions"? |
A mutual fund may, in the process of trading its underlying securities, realize long term or short term capital gains. These must be distributed to investors. As with dividends, there is usually the option to reinvest these distributed capital gains in additional fund shares. Capital gain distributions generally occur late in the year, but some funds make additional distributions at other times. In years when the values of the portfolio securities are increasing, funds with high turnover of securities often make significant capital gain distributions every year, while funds with low turnover of securities may accumulate unrealized gains for several years before selling the securities, realizing the gain, and making a large capital gain distribution. Also, funds that are increasing in size tend to make smaller capital gain distributions because they buy more than they sell, while funds decreasing in size tend to make larger capital gain distributions because they sell more than they buy. Of course, if the values of the portfolio securities are falling, the fund is more likely to generate capital losses, which it can use to offset future capital gains, if any.
A capital gains distribution lowers the net asset value of the fund by the amount of the distribution. The shareholder does not actually lose money because of the distribution, since he or she gets cash or additional shares to compensate for the lower net asset value. Distributions have important tax consequences. Investors should consult their tax advisor for more details. |
