Mutual Funds
This collection of personal financial information is directed to works for a
living. Everyone needs to know more about financial matters. The SOURCE
for much of this information is the GSA Consumer Information Catalog published
by the Federal Citizen Information Center.
Invest Wisely:
An Introduction to Mutual Funds
Over the past decade, American investors increasingly have turned to mutual
funds to save for retirement and other financial goals. Mutual funds can offer
the advantages of diversification and professional management. But, as with
other investment choices, investing in mutual funds involves risk. And fees and
taxes will diminish a fund's returns. It pays to understand both the upsides and
the downsides of mutual fund investing and how to choose products that match
your goals and tolerance for risk.
This brochure explains the basics of mutual fund investing — how mutual
funds work, what factors to consider before investing, and how to avoid common
pitfalls.
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Key Points to Remember
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Mutual funds are not guaranteed or insured by the FDIC or any
other government agency — even if you buy through a bank and the fund
carries the bank's name. You can lose money investing in mutual funds.
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Past performance is not a reliable indicator of future performance. So
don't be dazzled by last year's high returns. But past performance can help
you assess a fund's volatility over time.
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All mutual funds have costs that lower your investment returns. Shop
around, and use the SEC's Mutual Fund Cost Calculator at www.sec.gov/investor/tools.shtml
to compare many of the costs of owning different funds before you
buy.
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How Mutual Funds Work
What They Are
A mutual fund is a company that pools money from many investors and invests
the money in stocks, bonds, short-term money-market instruments, other
securities or assets, or some combination of these investments. The combined
holdings the mutual fund owns are known as its portfolio. Each share represents
an investor's proportionate ownership of the fund's holdings and the income
those holdings generate.
Other Types of Investment Companies
Legally known as an "open-end company," a mutual fund is
one of three basic types of investment companies. While this brochure
discusses only mutual funds, you should be aware that other
pooled investment vehicles exist and may offer features that you desire.
The two other basic types of investment companies are:
Closed-end funds — which, unlike mutual funds, sell a fixed
number of shares at one time (in an initial public offering) that later
trade on a secondary market; and
Unit Investment Trusts (UITs) — which make a one-time
public offering of only a specific, fixed number of redeemable
securities called "units" and which will terminate and
dissolve on a date specified at the creation of the UIT.
"Exchange-traded funds" (ETFs) are a type of investment
company that aims to achieve the same return as a particular market
index. They can be either open-end companies or UITs. But ETFs are not
considered to be, and are not permitted to call themselves, mutual
funds.
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Some of the traditional, distinguishing characteristics of mutual funds
include the following:
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Investors purchase mutual fund shares from the fund itself (or
through a broker for the fund) instead of from other investors on a
secondary market, such as the New York Stock Exchange or Nasdaq Stock
Market.
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The price that investors pay for mutual fund shares is the fund's
per share net asset value (NAV) plus any shareholder fees that the fund
imposes at the time of purchase (such as sales loads).
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Mutual fund shares are "redeemable," meaning investors can
sell their shares back to the fund (or to a broker acting for the fund).
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Mutual funds generally create and sell new shares to accommodate new
investors. In other words, they sell their shares on a continuous basis,
although some funds stop selling when, for example, they become too
large.
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The investment portfolios of mutual funds typically are managed by
separate entities known as "investment advisers" that are
registered with the SEC.
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A Word About Hedge Funds and "Funds of Hedge Funds"
"Hedge fund" is a general, non-legal term used to describe
private, unregistered investment pools that traditionally have been
limited to sophisticated, wealthy investors. Hedge funds are not
mutual funds and, as such, are not subject to the numerous
regulations that apply to mutual funds for the protection of investors
— including regulations requiring a certain degree of liquidity,
regulations requiring that mutual fund shares be redeemable at any time,
regulations protecting against conflicts of interest, regulations to
assure fairness in the pricing of fund shares, disclosure regulations,
regulations limiting the use of leverage, and more.
"Funds of hedge funds," a relatively new type of
investment product, are investment companies that invest in hedge funds.
Some, but not all, register with the SEC and file semi-annual reports.
They often have lower minimum investment thresholds than traditional,
unregistered hedge funds and can sell their shares to a larger number of
investors. Like hedge funds, funds of hedge funds are not mutual funds.
Unlike open-end mutual funds, funds of hedge funds offer very limited
rights of redemption. And, unlike ETFs, their shares are not typically
listed on an exchange.
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Advantages and Disadvantages
Every investment has advantages and disadvantages. But it's important to
remember that features that matter to one investor may not be important to you.
Whether any particular feature is an advantage for you will depend on your
unique circumstances. For some investors, mutual funds provide an attractive
investment choice because they generally offer the following features:
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Professional Management — Professional money managers research,
select, and monitor the performance of the securities the fund purchases.
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Diversification — Diversification is an investing strategy that
can be neatly summed up as "Don't put all your eggs in one
basket." Spreading your investments across a wide range of companies
and industry sectors can help lower your risk if a company or sector fails.
Some investors find it easier to achieve diversification through ownership
of mutual funds rather than through ownership of individual stocks or bonds.
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Affordability — Some mutual funds accommodate investors who
don't have a lot of money to invest by setting relatively low dollar amounts
for initial purchases, subsequent monthly purchases, or both.
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Liquidity — Mutual fund investors can readily redeem their
shares at the current NAV — plus any fees and charges assessed on
redemption — at any time.
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But mutual funds also have features that some investors might view as
disadvantages, such as:
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Costs Despite Negative Returns — Investors must pay sales
charges, annual fees, and other expenses (which we'll discuss below)
regardless of how the fund performs. And, depending on the timing of their
investment, investors may also have to pay taxes on any capital gains
distribution they receive — even if the fund went on to perform poorly
after they bought shares.
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Lack of Control — Investors typically cannot ascertain the
exact make-up of a fund's portfolio at any given time, nor can they directly
influence which securities the fund manager buys and sells or the timing of
those trades.
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Price Uncertainty — With an individual stock, you can obtain
real-time (or close to real-time) pricing information with relative ease by
checking financial websites or by calling your broker. You can also monitor
how a stock's price changes from hour to hour — or even second to second.
By contrast, with a mutual fund, the price at which you purchase or redeem
shares will typically depend on the fund's NAV, which the fund might not
calculate until many hours after you've placed your order. In general,
mutual funds must calculate their NAV at least once every business day,
typically after the major U.S. exchanges close.
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Different Types of Funds
When it comes to investing in mutual funds, investors have literally
thousands of choices. Before you invest in any given fund, decide whether the
investment strategy and risks of the fund are a good fit for you. The first step
to successful investing is figuring out your financial goals and risk tolerance
— either on your own or with the help of a financial professional. Once you
know what you're saving for, when you'll need the money, and how much risk you
can tolerate, you can more easily narrow your choices.
Most mutual funds fall into one of three main categories — money market
funds, bond funds (also called "fixed income" funds), and stock funds
(also called "equity" funds). Each type has different features and
different risks and rewards. Generally, the higher the potential return, the
higher the risk of loss.
Money Market Funds
Money market funds have relatively low risks, compared to other mutual funds
(and most other investments). By law, they can invest in only certain
high-quality, short-term investments issued by the U.S. government, U.S.
corporations, and state and local governments. Money market funds try to keep
their net asset value (NAV) — which represents the value of one share in a
fund — at a stable $1.00 per share. But the NAV may fall below $1.00 if the
fund's investments perform poorly. Investor losses have been rare, but they are
possible.
Money market funds pay dividends that generally reflect short-term interest
rates, and historically the returns for money market funds have been lower than
for either bond or stock funds. That's why "inflation risk" — the
risk that inflation will outpace and erode investment returns over time — can
be a potential concern for investors in money market funds.
Bond Funds
Bond funds generally have higher risks than money market funds, largely
because they typically pursue strategies aimed at producing higher yields.
Unlike money market funds, the SEC's rules do not restrict bond funds to
high-quality or short-term investments. Because there are many different types
of bonds, bond funds can vary dramatically in their risks and rewards. Some of
the risks associated with bond funds include:
Credit Risk — the possibility that companies or other issuers whose
bonds are owned by the fund may fail to pay their debts (including the debt owed
to holders of their bonds). Credit risk is less of a factor for bond funds that
invest in insured bonds or U.S. Treasury bonds. By contrast, those that invest
in the bonds of companies with poor credit ratings generally will be subject to
higher risk.
Interest Rate Risk — the risk that the market value of the bonds
will go down when interest rates go up. Because of this, you can lose money in
any bond fund, including those that invest only in insured bonds or Treasury
bonds. Funds that invest in longer-term bonds tend to have higher interest rate
risk.
Prepayment Risk — the chance that a bond will be paid off early.
For example, if interest rates fall, a bond issuer may decide to pay off (or
"retire") its debt and issue new bonds that pay a lower rate. When
this happens, the fund may not be able to reinvest the proceeds in an investment
with as high a return or yield.
Stock Funds
Although a stock fund's value can rise and fall quickly (and dramatically)
over the short term, historically stocks have performed better over the long
term than other types of investments — including corporate bonds, government
bonds, and treasury securities.
Overall "market risk" poses the greatest potential danger for
investors in stocks funds. Stock prices can fluctuate for a broad range of
reasons — such as the overall strength of the economy or demand for particular
products or services.
Not all stock funds are the same. For example:
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Growth funds focus on stocks that may not pay a regular
dividend but have the potential for large capital gains.
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Income funds invest in stocks that pay regular dividends.
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Index funds aim to achieve the same return as a particular
market index, such as the S&P 500 Composite Stock Price Index, by
investing in all — or perhaps a representative sample — of the
companies included in an index.
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Sector funds may specialize in a particular industry segment,
such as technology or consumer products stocks.
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How to Buy and Sell Shares
You can purchase shares in some mutual funds by contacting the fund
directly. Other mutual fund shares are sold mainly through brokers, banks,
financial planners, or insurance agents. All mutual funds will redeem (buy back)
your shares on any business day and must send you the payment within seven days.
The easiest way to determine the value of your shares is to call the fund's
toll-free number or visit its website. The financial pages of major newspapers
sometimes print the NAVs for various mutual funds. When you buy shares, you pay
the current NAV per share plus any fee the fund assesses at the time of
purchase, such as a purchase sales load or other type of purchase fee. When you
sell your shares, the fund will pay you the NAV minus any fee the fund assesses
at the time of redemption, such as a deferred (or back-end) sales load or
redemption fee. A fund's NAV goes up or down daily as its holdings change in
value.
Exchanging Shares
A "family of funds" is a group of mutual funds that share
administrative and distribution systems. Each fund in a family may have
different investment objectives and follow different strategies.
Some funds offer exchange privileges within a family of funds,
allowing shareholders to transfer their holdings from one fund to
another as their investment goals or tolerance for risk change. While
some funds impose fees for exchanges, most funds typically do not. To
learn more about a fund's exchange policies, call the fund's toll-free
number, visit its website, or read the "shareholder
information" section of the prospectus.
Bear in mind that exchanges have tax consequences. Even if the fund
doesn't charge you for the transfer, you'll be liable for any capital
gain on the sale of your old shares — or, depending on the
circumstances, eligible to take a capital loss. We'll discuss taxes in
further detail below.
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How Funds Can Earn Money for You
You can earn money from your investment in three ways:
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Dividend Payments — A fund may earn income in the form of
dividends and interest on the securities in its portfolio. The fund then
pays its shareholders nearly all of the income (minus disclosed expenses) it
has earned in the form of dividends.
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Capital Gains Distributions — The price of the securities a
fund owns may increase. When a fund sells a security that has increased in
price, the fund has a capital gain. At the end of the year, most funds
distribute these capital gains (minus any capital losses) to investors.
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Increased NAV — If the market value of a fund's portfolio
increases after deduction of expenses and liabilities, then the value (NAV)
of the fund and its shares increases. The higher NAV reflects the higher
value of your investment.
With respect to dividend payments and capital gains distributions, funds
usually will give you a choice: the fund can send you a check or other form of
payment, or you can have your dividends or distributions reinvested in
the fund to buy more shares (often without paying an additional sales load).
Factors to Consider
Thinking about your long-term investment strategies and tolerance for risk
can help you decide what type of fund is best suited for you. But you should
also consider the effect that fees and taxes will have on your returns over
time.
Degrees of Risk
All funds carry some level of risk. You may lose some or all of the money
you invest — your principal — because the securities held by a fund go up
and down in value. Dividend or interest payments may also fluctuate as market
conditions change.
Before you invest, be sure to read a fund's prospectus and shareholder
reports to learn about its investment strategy and the potential risks. Funds
with higher rates of return may take risks that are beyond your comfort level
and are inconsistent with your financial goals.
A Word About Derivatives
Derivatives are financial instruments whose performance is derived,
at least in part, from the performance of an underlying asset, security,
or index. Even small market movements can dramatically affect their
value, sometimes in unpredictable ways.
There are many types of derivatives with many different uses. A
fund's prospectus will disclose whether and how it may use derivatives.
You may also want to call a fund and ask how it uses these instruments.
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Fees and Expenses
As with any business, running a mutual fund involves costs — including
shareholder transaction costs, investment advisory fees, and marketing and
distribution expenses. Funds pass along these costs to investors by imposing
fees and expenses. It is important that you understand these charges because
they lower your returns.
Some funds impose "shareholder fees" directly on investors
whenever they buy or sell shares. In addition, every fund has regular,
recurring, fund-wide "operating expenses." Funds typically pay their
operating expenses out of fund assets — which means that investors indirectly
pay these costs.
SEC rules require funds to disclose both shareholder fees and operating
expenses in a "fee table" near the front of a fund's prospectus. The
lists below will help you decode the fee table and understand the various fees a
fund may impose:
Shareholder Fees
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Sales Charge (Load) on Purchases — the amount you pay when you
buy shares in a mutual fund. Also known as a "front-end load,"
this fee typically goes to the brokers that sell the fund's shares.
Front-end loads reduce the amount of your investment. For example, let's say
you have $1,000 and want to invest it in a mutual fund with a 5% front-end
load. The $50 sales load you must pay comes off the top, and the remaining
$950 will be invested in the fund. According to NASD rules, a front-end load
cannot be higher than 8.5% of your investment.
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Purchase Fee — another type of fee that some funds charge their
shareholders when they buy shares. Unlike a front-end sales load, a purchase
fee is paid to the fund (not to a broker) and is typically imposed to defray
some of the fund's costs associated with the purchase.
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Deferred Sales Charge (Load) — a fee you pay when you sell your
shares. Also known as a "back-end load," this fee typically goes
to the brokers that sell the fund's shares. The most common type of back-end
sales load is the "contingent deferred sales load" (also known as
a "CDSC" or "CDSL"). The amount of this type of load
will depend on how long the investor holds his or her shares and typically
decreases to zero if the investor holds his or her shares long enough.
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Redemption Fee — another type of fee that some funds charge
their shareholders when they sell or redeem shares. Unlike a deferred sales
load, a redemption fee is paid to the fund (not to a broker) and is
typically used to defray fund costs associated with a shareholder's
redemption.
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Exchange Fee — a fee that some funds impose on shareholders if
they exchange (transfer) to another fund within the same fund group or
"family of funds."
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Account fee — a fee that some funds separately impose on
investors in connection with the maintenance of their accounts. For example,
some funds impose an account maintenance fee on accounts whose value is less
than a certain dollar amount.
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Annual Fund Operating Expenses
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Management Fees — fees that are paid out of fund assets to the
fund's investment adviser for investment portfolio management, any other
management fees payable to the fund's investment adviser or its affiliates,
and administrative fees payable to the investment adviser that are not
included in the "Other Expenses" category (discussed below).
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Distribution [and/or Service] Fees ("12b-1" Fees) —
fees paid by the fund out of fund assets to cover the costs of marketing and
selling fund shares and sometimes to cover the costs of providing
shareholder services. "Distribution fees" include fees to
compensate brokers and others who sell fund shares and to pay for
advertising, the printing and mailing of prospectuses to new investors, and
the printing and mailing of sales literature. "Shareholder Service
Fees" are fees paid to persons to respond to investor inquiries and
provide investors with information about their investments.
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Other Expenses — expenses not included under "Management
Fees" or "Distribution or Service (12b-1) Fees," such as any
shareholder service expenses that are not already included in the 12b-1
fees, custodial expenses, legal and accounting expenses, transfer agent
expenses, and other administrative expenses.
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Total Annual Fund Operating Expenses ("Expense Ratio")
— the line of the fee table that represents the total of all of a fund's
annual fund operating expenses, expressed as a percentage of the fund's
average net assets. Looking at the expense ratio can help you make
comparisons among funds.
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A Word About "No-Load" Funds
Some funds call themselves "no-load." As the name implies,
this means that the fund does not charge any type of sales load. But, as
discussed above, not every type of shareholder fee is a "sales
load." A no-load fund may charge fees that are not sales loads,
such as purchase fees, redemption fees, exchange fees, and account fees.
No-load funds will also have operating expenses.
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Be sure to review carefully the fee tables of any funds you're considering,
including no-load funds. Even small differences in fees can translate into large
differences in returns over time. For example, if you invested $10,000 in a fund
that produced a 10% annual return before expenses and had annual operating
expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the
fund had expenses of only 0.5%, then you would end up with $60,858 — an 18%
difference.
The SEC's online, interactive Mutual
Fund Cost Calculator can help you understand the impact that many types of
fees and expenses can have over time. It takes only minutes to compare the costs
of different mutual funds.
A Word About Breakpoints
Some mutual funds that charge front-end sales
loads will charge lower sales loads for larger investments. The
investment levels required to obtain a reduced sales load are commonly
referred to as "breakpoints."
The SEC does not require a fund to offer breakpoints in the fund's
sales load. But, if breakpoints exist, the fund must disclose them. In
addition, a NASD member brokerage firm should not sell you shares of a
fund in an amount that is "just below" the fund's sales load
breakpoint simply to earn a higher commission.
Each fund company establishes its own formula for how they will
calculate whether an investor is entitled to receive a breakpoint. For
that reason, it is important to seek out breakpoint information from
your financial advisor or the fund itself. You'll need to ask how a
particular fund establishes eligibility for breakpoint discounts, as
well as what the fund's breakpoint amounts are.
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Classes of Funds
Many mutual funds offer more than one class of shares. For example, you may
have seen a fund that offers "Class A" and "Class B" shares.
Each class will invest in the same "pool" (or investment portfolio) of
securities and will have the same investment objectives and policies. But each
class will have different shareholder services and/or distribution arrangements
with different fees and expenses. As a result, each class will likely have
different performance results.
A multi-class structure offers investors the ability to select a fee and
expense structure that is most appropriate for their investment goals (including
the time that they expect to remain invested in the fund). Here are some key
characteristics of the most common mutual fund share classes offered to
individual investors:
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Class A Shares — Class A shares typically impose a front-end
sales load. They also tend to have a lower 12b-1 fee and lower annual
expenses than other mutual fund share classes. Be aware that some mutual
funds reduce the front-end load as the size of your investment increases. If
you're considering Class A shares, be sure to inquire about breakpoints.
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Class B Shares — Class B shares typically do not have a
front-end sales load. Instead, they may impose a contingent deferred sales
load and a 12b-1 fee (along with other annual expenses). Class B shares also
might convert automatically to a class with a lower 12b-1 fee if the
investor holds the shares long enough.
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Class C Shares — Class C shares might have a 12b-1 fee, other
annual expenses, and either a front- or back-end sales load. But the front-
or back-end load for Class C shares tends to be lower than for Class A or
Class B shares, respectively. Unlike Class B shares, Class C shares
generally do not convert to another class. Class C shares tend to have
higher annual expenses than either Class A or Class B shares.
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Tax Consequences
When you buy and hold an individual stock or bond, you must pay income
tax each year on the dividends or interest you receive. But you won't have
to pay any capital gains tax until you actually sell and unless you make
a profit.
Mutual funds are different. When you buy and hold mutual
fund shares, you will owe income tax on any ordinary dividends in the year you
receive or reinvest them. And, in addition to owing taxes on any personal
capital gains when you sell your shares, you may also have to pay taxes each
year on the fund's capital gains. That's because the law requires mutual
funds to distribute capital gains to shareholders if they sell securities for a
profit that can't be offset by a loss.
Tax Exempt Funds
If you invest in a tax-exempt fund — such as a municipal bond fund
— some or all of your dividends will be exempt from federal (and
sometimes state and local) income tax. You will, however, owe taxes on
any capital gains.
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Bear in mind that if you receive a capital gains distribution, you will
likely owe taxes — even if the fund has had a negative return from the point
during the year when you purchased your shares. For this reason, you should call
the fund to find out when it makes distributions so you won't pay more than your
fair share of taxes. Some funds post that information on their websites.
SEC rules require mutual funds to disclose in their prospectuses after-tax
returns. In calculating after-tax returns, mutual funds must use standardized
formulas similar to the ones used to calculate before-tax average annual total
returns. You'll find a fund's after-tax returns in the "Risk/Return
Summary" section of the prospectus. When comparing funds, be sure to take
taxes into account.
Avoiding Common Pitfalls
If you decide to invest in mutual funds, be sure to obtain as much
information about the fund before you invest. And don't make assumptions
about the soundness of the fund based solely on its past performance or its
name.
Sources of Information
Prospectus
When you purchase shares of a mutual fund, the fund must provide
you with a prospectus. But you can — and should — request and read a
fund's prospectus before you invest. The prospectus is the fund's
selling document and contains valuable information, such as the fund's
investment objectives or goals, principal strategies for achieving those
goals, principal risks of investing in the fund, fees and expenses, and past
performance. The prospectus also identifies the fund's managers and advisers
and describes how to purchase and redeem fund shares.
While they may seem daunting at first, mutual fund prospectuses contain a
treasure trove of valuable information. The SEC requires funds to include
specific categories of information in their prospectuses and to present key
data (such as fees and past performance) in a standard format so that
investors can more easily compare different funds.
Here's some of what you'll find in mutual fund prospectuses:
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Date of Issue — The date of the prospectus should appear on
the front cover. Mutual funds must update their prospectuses at least once
a year, so always check to make sure you're looking at the most recent
version.
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Risk/Return Bar Chart and Table — Near the front of the
prospectus, right after the fund's narrative description of its investment
objectives or goals, strategies, and risks, you'll find a bar chart
showing the fund's annual total returns for each of the last 10 years (or
for the life of the fund if it is less than 10 years old). All funds that
have had annual returns for at least one calendar year must include this
chart.
Except in limited circumstances, funds also must include a table
that sets forth returns — both before and after taxes — for the past
1-, 5-, and 10-year periods. The table will also include the returns of an
appropriate broad-based index for comparison purposes. Here's what the
table will look like:
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1-year
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5-year (or
life of fund)
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10-year (or
life of fund)
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Return before taxes
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___%
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___%
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___%
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Return after taxes on distributions
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___%
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___%
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___%
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Return after taxes on distributions and sale of
fund shares
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___%
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___%
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___%
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Index
(reflects no deductions for [fees, expenses, or taxes])
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___%
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___%
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___%
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Note: Be sure to read any footnotes or accompanying explanations to make
sure that you fully understand the data the fund provides in the bar chart
and table. Also, bear in mind that the bar chart and table for a
multiple-class fund (that offers more than one class of fund shares in the
prospectus) will typically show performance data and returns for only
one class.
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Fee Table — Following the performance bar chart and annual
returns table, you'll find a table that describes the fund's fees and
expenses. These include the shareholder fees and annual fund operating
expenses described in greater detail above. The fee table includes an
example that will help you compare costs among different funds by showing
you the costs associated with investing a hypothetical $10,000 over a 1-,
3-, 5-, and 10-year period.
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Financial Highlights — This section, which generally appears
towards the back of the prospectus, contains audited data concerning the
fund's financial performance for each of the past 5 years. Here you'll
find net asset values (for both the beginning and end of each period),
total returns, and various ratios, including the ratio of expenses to
average net assets, the ratio of net income to average net assets, and the
portfolio turnover rate.
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Profile
Some mutual funds also furnish investors with a "profile," which
summarizes key information contained in the fund's prospectus, such as the
fund's investment objectives, principal investment strategies, principal risks,
performance, fees and expenses, after-tax returns, identity of the fund's
investment adviser, investment requirements, and other information.
Statement of Additional Information ("SAI")
Also known as "Part B" of the registration statement, the SAI
explains a fund's operations in greater detail than the prospectus — including
the fund's financial statements and details about the history of the fund, fund
policies on borrowing and concentration, the identity of officers, directors,
and persons who control the fund, investment advisory and other services,
brokerage commissions, tax matters, and performance such as yield and average
annual total return information. If you ask, the fund must send you an SAI. The
back cover of the fund's prospectus should contain information on how to obtain
the SAI.
Shareholder Reports
A mutual fund also must provide shareholders with annual and semi-annual
reports within 60 days after the end of the fund's fiscal year and 60 days after
the fund's fiscal mid-year. These reports contain a variety of updated financial
information, a list of the fund's portfolio securities, and other information.
The information in the shareholder reports will be current as of the date of the
particular report (that is, the last day of the fund's fiscal year for the
annual report, and the last day of the fund's fiscal mid-year for the
semi-annual report).
Investors can obtain all of these documents by:
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Calling or writing to the fund (all mutual funds have toll-free
telephone numbers);
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Visiting the fund's website;
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Contacting a broker that sells the fund's shares;
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Searching the SEC's EDGAR
database and downloading the documents for free; or
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Contacting the SEC's Office of Public Reference by telephone at
(202) 551-8090, by fax at (202) 942-9001 (fax), or by email at publicinfo@sec.gov.
Please be aware that we charge $0.24 per page for photocopying.
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Past Performance
A fund's past performance is not as important as you might think.
Advertisements, rankings, and ratings often emphasize how well a fund has
performed in the past. But studies show that the future is often different. This
year's "number one" fund can easily become next year's below average
fund.
Be sure to find out how long the fund has been in existence. Newly created
or small funds sometimes have excellent short-term performance records. Because
these funds may invest in only a small number of stocks, a few successful stocks
can have a large impact on their performance. But as these funds grow larger and
increase the number of stocks they own, each stock has less impact on
performance. This may make it more difficult to sustain initial results.
While past performance does not necessarily predict future returns, it can
tell you how volatile (or stable) a fund has been over a period of time.
Generally, the more volatile a fund, the higher the investment risk. If you'll
need your money to meet a financial goal in the near-term, you probably can't
afford the risk of investing in a fund with a volatile history because you will
not have enough time to ride out any declines in the stock market.
Looking Beyond a Fund's Name
Don't assume that a fund called the "XYZ Stock Fund" invests only
in stocks or that the "Martian High-Yield Fund" invests only in
the securities of companies headquartered on the planet Mars. The SEC requires
that any mutual fund with a name suggesting that it focuses on a particular type
of investment must invest at least 80% of its assets in the type of investment
suggested by its name. But funds can still invest up to one-fifth of their
holdings in other types of securities — including securities that you might
consider too risky or perhaps not aggressive enough.
Bank Products versus Mutual Funds
Many banks now sell mutual funds, some of which carry the bank's name. But
mutual funds sold in banks, including money market funds, are not bank
deposits. As a result, they are not federally insured by the Federal
Deposit Insurance Corporation (FDIC).
Money Market Matters
Don't confuse a "money market fund" with a "money
market deposit account." The names are similar, but they are
completely different:
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A money market fund is a type of mutual fund. It is not
guaranteed or FDIC insured. When you buy shares in a money market
fund, you should receive a prospectus.
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A money market deposit account is a bank deposit. It is
guaranteed and FDIC insured. When you deposit money in a money
market deposit account, you should receive a Truth in Savings form.
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If You Have Problems
If you encounter a problem with your mutual fund, you can send us your
complaint using our online
complaint form. You can also reach us by regular mail at:
Securities and Exchange Commission
Office of Investor Education and Assistance
100 F Street, N.E.
Washington, D.C. 20549-0213
For more information about investing wisely and avoiding fraud, please check
out the Investor Information
section of our website.
Glossary of Key Mutual Fund Terms
12b-1 Fees — fees paid by the fund out of fund assets to cover the
costs of marketing and selling fund shares and sometimes to cover the costs of
providing shareholder services. "Distribution fees" include fees to
compensate brokers and others who sell fund shares and to pay for advertising,
the printing and mailing of prospectuses to new investors, and the printing and
mailing of sales literature. "Shareholder Service Fees" are fees paid
to persons to respond to investor inquiries and provide investors with
information about their investments.
Account Fee — a fee that some funds separately impose on investors
for the maintenance of their accounts. For example, accounts below a specified
dollar amount may have to pay an account fee.
Back-end Load — a sales charge (also known as a "deferred
sales charge") investors pay when they redeem (or sell) mutual fund shares,
generally used by the fund to compensate brokers.
Classes — different types of shares issued by a single fund, often
referred to as Class A shares, Class B shares, and so on. Each
class invests in the same "pool" (or investment portfolio) of
securities and has the same investment objectives and policies. But each class
has different shareholder services and/or distribution arrangements with
different fees and expenses and therefore different performance results.
Closed-End Fund — a type of investment company that does not
continuously offer its shares for sale but instead sells a fixed number of
shares at one time (in the initial public offering) which then typically trade
on a secondary market, such as the New York Stock Exchange or the Nasdaq Stock
Market. Legally known as a "closed-end company."
Contingent Deferred Sales Load — a type of back-end load, the
amount of which depends on the length of time the investor held his or her
shares. For example, a contingent deferred sales load might be (X)% if an
investor holds his or her shares for one year, (X-1)% after two years, and so on
until the load reaches zero and goes away completely.
Conversion — a feature some funds offer that allows investors to
automatically change from one class to another (typically with lower annual
expenses) after a set period of time. The fund's prospectus or profile will
state whether a class ever converts to another class.
Deferred Sales Charge — see "back-end load" (above).
Distribution Fees — fees paid out of fund assets to cover expenses
for marketing and selling fund shares, including advertising costs, compensation
for brokers and others who sell fund shares, and payments for printing and
mailing prospectuses to new investors and sales literature prospective
investors. Sometimes referred to as "12b-1 fees."
Exchange Fee — a fee that some funds impose on shareholders if they
exchange (transfer) to another fund within the same fund group.
Exchange-Traded Funds — a type of an investment company (either an
open-end company or UIT) whose objective is to achieve the same return as a
particular market index. ETFs differ from traditional open-end companies and
UITs, because, pursuant to SEC exemptive orders, shares issued by ETFs trade on
a secondary market and are only redeemable from the fund itself in very large
blocks (blocks of 50,000 shares for example).
Expense Ratio — the fund's total annual operating expenses
(including management fees, distribution (12b-1) fees, and other expenses)
expressed as a percentage of average net assets.
Front-end Load — an upfront sales charge investors pay when they
purchase fund shares, generally used by the fund to compensate brokers. A
front-end load reduces the amount available to purchase fund shares.
Index Fund — describes a type of mutual fund or Unit Investment
Trust (UIT) whose investment objective typically is to achieve the same return
as a particular market index, such as the S&P 500 Composite Stock Price
Index, the Russell 2000 Index, or the Wilshire 5000 Total Market Index.
Investment Adviser — generally, a person or entity who receives
compensation for giving individually tailored advice to a specific person on
investing in stocks, bonds, or mutual funds. Some investment advisers also
manage portfolios of securities, including mutual funds.
Investment Company — a company (corporation, business trust,
partnership, or limited liability company) that issues securities and is
primarily engaged in the business of investing in securities. The three basic
types of investment companies are mutual funds, closed-end funds, and unit
investment trusts.
Load — see "Sales Charge."
Management Fee — fee paid out of fund assets to the fund's
investment adviser or its affiliates for managing the fund's portfolio, any
other management fee payable to the fund's investment adviser or its affiliates,
and any administrative fee payable to the investment adviser that are not
included in the "Other Expenses" category. A fund's management fee
appears as a category under "Annual Fund Operating Expenses" in the
Fee Table.
Market Index — a measurement of the performance of a specific
"basket" of stocks considered to represent a particular market or
sector of the U.S. stock market or the economy. For example, the Dow Jones
Industrial Average (DJIA) is an index of 30 "blue chip" U.S. stocks of
industrial companies (excluding transportation and utility companies).
Mutual Fund — the common name for an open-end investment company.
Like other types of investment companies, mutual funds pool money from many
investors and invest the money in stocks, bonds, short-term money-market
instruments, or other securities. Mutual funds issue redeemable shares that
investors purchase directly from the fund (or through a broker for the fund)
instead of purchasing from investors on a secondary market.
NAV (Net Asset Value) — the value of the fund's assets minus its
liabilities. SEC rules require funds to calculate the NAV at least once daily.
To calculate the NAV per share, simply subtract the fund's liabilities from its
assets and then divide the result by the number of shares outstanding.
No-load Fund — a fund that does not charge any type of sales load.
But not every type of shareholder fee is a "sales load," and a no-load
fund may charge fees that are not sales loads. No-load funds also charge
operating expenses.
Open-End Company — the legal name for a mutual fund. An open-end
company is a type of investment company
Operating Expenses — the costs a fund incurs in connection with
running the fund, including management fees, distribution (12b-1) fees, and
other expenses.
Portfolio — an individual's or entity's combined holdings of
stocks, bonds, or other securities and assets.
Profile — summarizes key information about a mutual fund's costs,
investment objectives, risks, and performance. Although every mutual fund has a
prospectus, not every mutual fund has a profile.
Prospectus — describes the mutual fund to prospective investors.
Every mutual fund has a prospectus. The prospectus contains information about
the mutual fund's costs, investment objectives, risks, and performance. You can
get a prospectus from the mutual fund company (through its website or by phone
or mail). Your financial professional or broker can also provide you with a
copy.
Purchase Fee — a shareholder fee that some funds charge when
investors purchase mutual fund shares. Not the same as (and may be in addition
to) a front-end load.
Redemption Fee — a shareholder fee that some funds charge when
investors redeem (or sell) mutual fund shares. Redemption fees (which must be
paid to the fund) are not the same as (and may be in addition to) a back-end
load (which is typically paid to a broker). The SEC generally limits redemption
fees to 2%.
Sales Charge (or "Load") — the amount that investors pay
when they purchase (front-end load) or redeem (back-end load) shares in a mutual
fund, similar to a commission. The SEC's rules do not limit the size of sales
load a fund may charge, but NASD rules state that mutual fund sales loads cannot
exceed 8.5% and must be even lower depending on other fees and charges assessed.
Shareholder Service Fees — fees paid to persons to respond to
investor inquiries and provide investors with information about their
investments. See also "12b-1 fees."
Statement of Additional Information (SAI) — conveys information
about an open- or closed-end fund that is not necessarily needed by investors to
make an informed investment decision, but that some investors find useful.
Although funds are not required to provide investors with the SAI, they must
give investors the SAI upon request and without charge. Also known as "Part
B" of the fund's registration statement.
Total Annual Fund Operating Expense — the total of a fund's annual
fund operating expenses, expressed as a percentage of the fund's average net
assets. You'll find the total in the fund's fee table in the prospectus.
Unit Investment Trust (UIT) — a type of investment company that
typically makes a one-time "public offering" of only a specific, fixed
number of units. A UIT will terminate and dissolve on a date established when
the UIT is created (although some may terminate more than fifty years after they
are created). UITs do not actively trade their investment portfolios.
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