Mutual Funds

A mutual fund is an investment company that makes investments on behalf of investors sharing common financial goals. Traditionally, the term "mutual fund" has referred to "open-end" investment companies. In this brochure, however, the term will be used to refer to both "open-end" are defined elsewhere in this brochure.

A mutual fund pools the money of many people having similar investment objectives. Professional money managers employed by the fund use the pool of money to buy a wide range of stocks, bonds or money-market instruments which, in the mangers’ judgment, will help the investors to achieve their objectives. These securities form the underlying "portfolio" of the fund. The fund earns money on the securities and distributes the earnings to the investors as dividends or, if the securities are sold for a profit, as capital gains. Alternatively, investors may elect to have their dividends and capital gains automatically reinvested in additional fund shares.

An investor in a mutual fund is actually buying shares of the fund. Each share represents undivided, proportional ownership in all of the fund’s underlying securities. Dividends and capital gains produced by these securities are paid out in proportion to the number of fund shares the investor owns. Thus, shareholders who invest a few hundred dollars get the same investment return per dollar as do those who invest hundreds of thousands of dollars. For tax purposes, dividends and capital gains are treated substantially as if the investors had bought and sold the underlying securities themselves.

In today’s complex financial marketplace, mutual funds offer investors a simpler, more convenient, and less time-consuming method of investing in a portfolio of securities than if investors were to trade them individually. Through mutual funds, investors delegate investment decisions to the funds’ managers—decisions such as which securities to buy, when to buy them, and when to sell them. Also, investors in mutual funds participate in a broader diversity of securities than average investors could by investing on their own. This diversity can reduce their risk.

Mutual fund investors should select a fund which has an investment objective that closely matches their own. For example, they may want to maximize their current income, maximize the long-term growth of their capital, or achieve some combination of growth and income.