A guide to Understanding Mutual Funds

A guide to Understanding Mutual Funds

Introduction

Establishing realistic fi nancial goals is an essential fi rst 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 fi t 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.
Keeping Recent Investment Returns in Perspective
Successful investors base their performance expectations on historic average returns, and keep short-term 
market movements in perspective. 
 If your investment expectations are too high, and the market reverts to historic levels, you may fail to reach 
your fi nancial goals. To achieve your goals, it helps to follow a few basic rules of investing:
» Diversify your investments;
» Understand the relationship between risk and reward;
» Maintain realistic expectations about investment performance;
» Keep short-term market movements in perspective;
» Consider the impact that fees and taxes will have on your investment return; and
» Remember that an investment’s past performance is not necessarily indicative of its future results.
This three-part booklet explores these and other investment concepts in greater detail, explaining essential 
information about fund investing; helping you determine how funds can fi t into a well-formulated plan; 
and offering additional resources that can help you build on your knowledge of funds and investing.

About Mutual Funds

What Is a Mutual Fund?
A mutual fund is a company that invests in a diversifi ed portfolio of securities. People who buy shares of 
a mutual fund are its owners or shareholders. Their investments provide the money for a mutual fund to 
buy securities such as stocks and bonds. A mutual fund can make money from its securities in two ways: a 
security can pay dividends or interest to the fund, or a security can rise in value. A fund can also lose money 
and drop in value.
Different Funds, Different Features
There are three basic types of mutual funds—stock (also called equity), bond, and money market. Stock 
mutual funds invest primarily in shares of stock issued by U.S. or foreign companies. Bond mutual funds 
invest primarily in bonds. Money market mutual funds invest mainly in short-term securities issued by the 
U.S. government and its agencies, U.S. corporations, and state and local governments.

A guide to Understanding Mutual Funds