What is the Right Mutual Fund for Me?

By Kristi Vaughan

Even the newest of investors has heard something about mutual funds. But what do you really know about them? What are the differences between funds? And what fund is right for you?

What is a mutual fund?

A mutual fund is a pool of money that has come from many different people and is invested in stocks, bonds and other assets. The management team of that fund typically makes investment decisions. This management team receives a fee for overseeing the fund. The price that investors pay for each share represents the funds per share net asset value (NAV) plus shareholder fees, including sales loads.

Are there differences between funds?

Not all mutual funds are created alike. Some look for long-term growth. Some seek current income. A global fund is not the same as an international fund. To get the most from your investments it pays to have an understanding of the differences between funds. Some of the most common include:

Balanced Fund: Seeks growth from stocks and income with stability of principal from bonds.
Equity-income Fund: A mixture of dividend-paying stocks and bonds. Seeks current income and, as a secondary goal, growth of capital.
Fixed-income Fund: Invests in bonds and other fixed-income securities. Seeks current income and preservation of capital.
Global Fund: Invests in stocks or bonds throughout the world, including the United States.
Growth Fund: Seeks capital growth through price appreciation of securities. Primarily aims to produce an increase in investment value rather than a flow of dividends.
Growth-and-income Fund: Seeks growth of capital and current income. Invests mainly in the common stock of companies with a history of solid growth and a record of consistent dividend payments.
Income Fund: Seeks a high level of current income, often achieved by investing in common stocks of companies with good dividend-paying records and fixed-income securities.
Index Fund: Seeks to replicate market performance through a portfolio that mirrors the composition of an index such as the S&P 500.
International Fund: Invests outside the United States.
Money Market Fund: Seeks safety of principal and current income by investing in securities that mature in one year or less. Price per share is fixed at $1.00.
Sector Fund. Invests exclusively in a related group of industries.
Tax-exempt Fund: Invests in municipal bonds and is usually free from federal and/or state taxation.

Why invest in a mutual fund?

Mutual fund investments are not for everyone. Like all investments, they have a certain degree of risk. But for many people they a good fit.

Advantages to mutual funds include:

Professional management. Individuals trained in investments are selecting the securities.
Diversification. Because funds invest in a number of companies, the risk is spread out – at least within the parameters of the fund type.
Affordability. Even small investors can invest in mutual funds. Each fund sets its own minimum but many encourage small investors by setting up plans where the investor contributes a set amount each month. The investor then also benefits from an investing strategy known as dollar cost averaging.
Liquidity. Investors are free to sell their shares at any time. The price is based on the closing NAV for that day.

Disadvantages include:

Costs no matter what the performance. Whether the mutual fund’s performance is positive or negative there are still management and shareholder fees. Also, even though the NAV may have declined, if the fund realized capital gains, you will have to declare those gains on your income tax return.
Lack of individual control. The tradeoff for professional management is that you don’t always know what assets are included in the fund at any given time.
Lack of real-time pricing. Mutual fund shares generally are priced after the major U.S. stock exchanges close for the day. This means you probably are making buying and selling decisions without knowing the exact NAV.

Buying Mutual Funds

You can buy mutual funds directly from fund companies or you can buy through brokerage houses and financial advisors. The degree of assistance and advice you get depends, in large part, on whether you are working directly with a broker or financial advisor or whether you are doing the investing yourself. Many of the mutual fund Web sites contain informational articles and portfolio balancing tools to help you.