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An Introduction to Mutual Fund Investing
Investors have increasingly turned to mutual funds to meet their retirement and other financial goals. With so many options available, how do you choose the right one for you?
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Mutual Fund Benefits
Mutual funds offer the opportunity for a number of investors, who share a similar investment objective, to pool their money and have it invested and managed by professional investment managers.
Professional management. Mutual funds offer investors access to full time, professional money managers who have the expertise, experience and resources to actively buy, sell and monitor investments.
Affordability. Initial investments in most funds are reasonable, and the requirement for additional investments is usually even lower. Many funds require as little as $1,000 for initial investments and only a $50 minimum for subsequent investments.
Diversification. An investment in a mutual fund generally includes a number of different securities. For example, diversified stock fund portfolios usually hold an array of stocks representing different companies, different industries and perhaps even different nations. Diversification can help reduce the financial risk inherent in investing. If one investment decreases in value, another investment in the portfolio may increase.
Flexibility. Many mutual funds are part of a "family of funds," which means that as your investment objectives change, you can exchange shares from one fund to another in the same family at little or no cost. For example, Franklin Templeton Investments offers over 100 Franklin, Templeton and Mutual Series funds to help meet an investor's financial goals.
Liquidity. It's easy to withdraw some or all of the money you've invested. Typically, you can get your money within one week. Of course, the value of shares you redeem may be more or less than you originally paid for them.
Front-end and, in some cases, back-end sales loads, redemption fees, management fees, Rule 12b-1 fees and other expenses are associated with Franklin Templeton mutual fund investments. Investors' returns are reduced by these fees and expenses. Funds are offered through prospectuses, which contain detailed information about a fund's goals, charges, expenses and risks. They should be read carefully before investing.
Four Types of Funds
Although many types of mutual funds are available with differing objectives, they generally fall into four basic types: stock funds, bond funds, balanced funds/asset allocation funds and money market funds.
Stock funds. These funds invest in common stocks of public companies, generally with capital appreciation as the primary objective.
Bond funds. These funds invest in corporate, government and municipal bonds, generally with current income as the primary objective.
Hybrid funds/asset allocation funds. Hybrid funds allocate assets among stocks, bonds and money market instruments, with current income and capital growth as an objective. Similarly, asset allocation funds diversify assets among multiple mutual funds with long-term capital growth or total return as an objective.
Money market funds. These funds invest in certificates of deposit (CDs), commercial paper and highly liquid securities, with preservation of principal, liquidity and current income as their objective.
Money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.
Further Distinctions
Distinctions among mutual funds may further involve investment styles, market capitalization, specialization and geographic boundaries.
Investment styles. Stock fund styles may include growth, value and blend. Bond fund styles may focus on specific ranges of credit quality and maturity.
Growth funds invest in stocks of companies that appear well positioned to capitalize on long-term growth trends that may drive earnings higher.
Value funds invest in stocks that have been overlooked or are out-of-favor in the market.
Blend funds invest in a mix of growth and value.
Market capitalization. Stock funds may limit their investment universe to a portion of the market cap spectrum. Typically small cap funds will focus on companies whose market capitalization is less than $2 billion, while large cap funds will focus on companies with market capitalization greater than $10 billion. Mid cap funds usually focus on companies in between.
Specialization. Specialty bond funds and sector equity funds have this distinction.
Specialty bond funds invest in specific debt securities such as GNMAs, municipal bonds or corporate bonds.
Sector funds invest only in stocks of companies of one specific sector or industry, such as utilities, real estate or technology.
Geographic boundaries. Funds can also invest globally, internationally and in specific countries or regions.
Global. Global funds invest anywhere in the world (including the United States). Generally, global funds have a broad investment mandate and have the greatest number of stocks to choose from
International or foreign. International funds, also referred to as foreign funds, may invest only in companies based outside the United States. Typically, they invest in developed markets such as Asia or Europe.
Country or regional. Country- or region-specific funds that invest within one specific country or region such as India or BRIC.
How to Get Started
We support the concept of professional financial guidance. Why? Because financial advisors are trained to help you determine your long-term investment objectives, your level of risk tolerance, and the types of investments most appropriate for helping you achieve your goals.
We suggest you choose a financial advisor in much the same way you would choose any other professional. Rely on family and friends who have had positive experiences. If you get the names of several advisors, interview each of them. You'll be making important, long-term financial decisions with their guidance, so you want to feel comfortable sharing personal information with them and be sure that their approaches and areas of expertise are a good match for you.
Read the prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. Every mutual fund provides a legal document called a prospectus, which spells out in detail the fund’s investment goals and strategies, how to buy and sell shares, what services are available to shareholders and certain performance results. The prospectus also contains detailed information about a fund's sales charges, expenses and risks. This important information can help you decide if a fund is right for you.
The prospectus is free to you directly from the fund or from your financial advisor. Be sure to read it carefully before you invest or send money.
Additional Information
You can find out more about our mutual funds by continuing to read information on this website, visiting a financial advisor, or calling 1-800-DIAL BEN® for literature or additional information.
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