Understanding Mutual Funds - VCEE

A Guide to

Understanding Mutual Funds

INVESTMENT COMPANY INSTITUTE?

A Guide to

Understanding Mutual Funds

INVESTMENT COMPANY INSTITUTE?

Contents

Introduction

About Mutual Funds

What Is a Mutual Fund? ..............................6 Why Invest in a Mutual Fund? ....................7 Stock Funds ................................................9 Bond Funds ..............................................10 Money Market Funds ................................13 Investing Internationally ............................14 How Mutual Funds Are Structured ............16 Other Types of Investment Companies ......17

Establishing an Investment Plan

Establishing Goals and Realistic Expectations ............................18

Three Common Investment Goals ............20 Figuring Out Your Retirement Needs ........21 Dollar-cost Averaging ................................22 Establishing Realistic Expectations About

Performance ........................................23 The Risk of Inflation ................................25 The Annual Review ..................................26 Tax Considerations ....................................27

Becoming an Informed Investor

The Mutual Fund Prospectus and Shareholder Reports ..............................30

Publications and Websites ..........................32 How to Read a Mutual Fund Fee Table ......33 Should Fund Fees Affect Your Decision? ....36 Protecting Investors--

Who Oversees Mutual Funds? ..............37

Other Resources

Useful Addresses ........................................40 Questions About Business Practices ............42 Glossary of Mutual Fund Terms..................44

To The Reader

The Investment Company Institute is pleased to bring you A Guide to Understanding Mutual Funds. This guide, one of several in the Institute's Investor Awareness Series, is intended to explain mutual funds and the basic principles of investing.

During the past decade, interest in -- and information about -- investing has increased dramatically. Technological advances have ushered in a vast supply of new services that allow you to invest with ease. Mutual fund shareholders have benefited from these technological advances, as funds have continually offered improved services to meet changing investor needs.

Still, the most important advantages mutual funds offer over other types of investments remain unchanged since the first fund was offered in 1924: professional management -- the security of knowing your money is managed by a team of professionals devoted to reaching your investment objectives -- and diversification --the ability to invest affordably in a wide range of securities and reap market rewards while diminishing accompanying risks.

This guide is designed to increase your awareness of the benefits of funds and investing, and help you set realistic goals and expectations. If you would like to learn more, please visit our website at or write for a catalogue of additional investor awareness materials at ICI Investor Awareness Campaign, P.O. Box 27850, Washington, DC 20038-7850.

Paul Schott Stevens President, Investment Company Institute

Introduction

Establishing realistic financial goals is an essential first step toward successful investing. Understanding the investments best suited to helping you achieve your goals is equally important. Most Americans invest to meet long-term goals, such as ensuring a secure retirement or paying for a child's college education, but many also have more immediate goals, like making a down payment on a home or automobile. Mutual funds can fit well into either your long- or short-term investment strategy, but the success of your plan depends on the type of fund you choose. Because all funds invest in securities markets, it is crucial to maintain realistic expectations about the performance of those markets and choose funds best suited to your needs.

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