Making A Mutual Fund Game Plan

By Bob Evans

A mutual fund is an investment company that pools the money of many individuals and invests on their behalf. In accordance with predetermined objectives, this pool of money is generally invested in stocks, bonds or money-market securities by a professional portfolio manager, who receives a fee for his or her service.

Mutual funds issue shares, each of which represents proportional ownership of all the securities held by the fund. If a fund's securities generate current income or capital gains, these are passed along to investors based upon the number of shares owned. Most funds stand ready to issue new shares as more money is invested and to buy back, or redeem, shares as money is withdrawn.

Although thousands of mutual funds exist, choosing a fund should be based upon investment objectives. Most funds fall into one of three categories: money-market funds, income funds or equity funds.

Money-market funds are considered conservative investments in high-quality, short-term securities such
as bank certificates of deposit and U.S. Treasury bills. These funds usually offer investors two major benefits: stability of principal and interest income.

Income funds, or bond funds, invest in debt obligations issued by corporations or the government. These funds pay potential distributions to investors on a regular basis. Income funds generally seek higher yields than money-market funds. But with the potential of higher returns comes a greater degree of risk.

Equity funds, or stock funds, invest in stock issued by corporations. In general, they seek to provide capital appreciation. Although stock funds have historically provided above-average returns over the long term compared to bond or money-market investments, many stock funds invest in companies that pay dividends and thus also generate income.

Despite periods of volatility in the financial markets, mutual funds continue to experience exponential growth because they offer a range of benefits that few other investment vehicles can match. Here are some of the attractive benefits of mutual funds.

Diversification

Mutual funds generally distribute the pool of shareholder assets across many securities, lessening the potential of any one investment to have a negative effect on the total portfolio.

Management

Investing is a time-consuming task. Large institutions hire professional money managers to perform these tasks. With a mutual fund, you can access this same level of professional management.

Liquidity

Mutual fund investors can buy or sell shares at their current market value at any time. Investors have the ease of entry and exit, as well as the knowledge of their investment's worth on any given day.

Convenience

Mutual funds offer convenient record keeping. Shareholders receive periodic statements and annual reports that contain information on current prices, holdings, fees and earnings.

Flexibility

Some investors like to buy one fund and hold it for the long term. Others prefer to change funds as their financial needs change or the financial markets evolve. A "family" of mutual funds allows investors to make choices under an umbrella of general investing objectives.

Protection

Mutual funds are regulated by a number of federal and state laws and are also subject to oversight from the Securities and Exchange Commission. These strict regulations are designed to help protect investors and to assure that the industry is treating them fairly.

Affordability

Mutual funds are generally affordable. The minimum initial investment for most funds is between $500 and $2,500. Some funds even accept initial investments as low as $50 if the investor agrees to invest a fixed amount every month.

Selecting a mutual fund should not be a one-step process that ends with the purchase of shares. No single investment can fulfill every financial need. Instead, investors should consider a combination of investments that may help them achieve their goals. Speak with your financial consultant to decide which mutual fund or funds best suit your individual financial goals and needs.

Bob Evans is vice president of investing at Smith Barney in Dallas, Texas. He is making available to NASE Members a free copy of Smith Barney's mutual fund brochure, "How to Build Wealth and Enhance Your Financial Security." To receive your free copy, contact him at 1-800-766-1088.


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Mutual Fund Math

Wondering what mix you should have of money-market, income and stock mutual funds? That depends largely upon your financial goals and risk tolerance. But here's a common rule of thumb. From the number 100, subtract your age. The remaining number suggests the percentage of investment dollars you should have invested in stock, or equity, mutual funds.


Percent of Investment Dollars In Stock Funds At Age 25

The stock mutual funds (left) should be at 75 percent and the other mutual funds should be at 25 percent.


Percent of Investment Dollars In Stock Funds At Age 45

The stock mutual funds (left) should be at 55 percent and the other mutual funds should be at 35 percent.

 

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