Mutual funds are a popular investment choice for many investors. They offer simplicity, diversification and the flexibility to redeem shares on request. Mutual funds can help you build wealth and meet your short-term, medium-term and long-term financial goals.
A mutual fund is a “pool” of investments owned by many investors. When you put money into a mutual fund, the fund invests the money to produce profits and/or income for each investor’s fund account. The fund’s portfolio might be made up of a few dozen to hundreds of different securities.
To own a fund, you buy shares in it, and each share you own represents your portion of the entire pool of investments owned by the fund. Everyone invested in the fund shares in the gains and losses of fund investments.
Mutual funds are categorized in many different ways and any one fund can fall under multiple categories.
Asset class: a group of securities that have similar characteristics and values that tend to move in the same direction as other securities of the same class. The main asset classes are equities (stocks), fixed-income investments (such as bonds) and cash equivalents (including short‐term certificates of deposit and U.S. Treasury bills).
Diversification: a risk-management technique that involves spreading your savings around a large
enough quantity and variety of investments so that a significant loss on any one investment or segment of your portfolio won’t produce a big loss relative to your entire portfolio.
Index: a barometer of a specified type of investment and a benchmark against which investment performance is measured. A widely known index is the S&P 500, which tracks the stocks of the 500 largest U.S. stocks measured by their market capitalization (share price times number of shares in the market).
Evaluate funds by
What to consider
Funds are categorized by the primary asset class they invest in, such as:
A fund’s investment objective may be to achieve:
Some funds are identified by the technique or strategy they follow. For example:
|Management Style (Active or Passive)|
Funds are also categorized by how they pick their investments.
Mutual funds offer the following advantages for investors.
Like all investments, mutual funds can pose a degree of risk. Maybe the fund’s investments will perform poorly. Perhaps the financial markets where the fund invests will slump due to economic, political or other factors. Keep in mind, however, that funds come in a variety of risk and return profiles. For example, a fund that invests in stocks of “hot” start-up companies may pose more risk (and possibly provide a higher long-term return) than a fund that invests mostly in bonds, which offer more moderate risk and a moderate return.
Before deciding whether to invest in a certain mutual fund, consider your personal objectives, how much risk you’re comfortable with and your time horizon. Do as much research as you can, and use financial publications and websites to learn about specific funds. Many mutual fund company websites include information that helps you sort through their mutual funds using various criteria.
Every fund will have its own prospectus — a legal document that shows important details about the fund, including its investment objectives and technique and past performance. Review the prospectus of any fund you’re seriously considering buying. Find out about any commissions and other costs you may incur as an investor. Also, look up the fund’s expense ratio, which is calculated by dividing the fund’s annual expenses by its average net assets. Typically, a higher expense ratio lowers your return. However, keep in mind that lower expenses do not necessarily result in higher returns. You can find a fund’s prospectus on the mutual fund company’s website or call them directly for a copy.
There are a multitude of mutual funds and other investments to choose from. If you don’t feel knowledgeable enough to choose investments confidently, consider hiring a professional financial or investment advisor for guidance. An advisor can help you create the right mix of investments based on your personal goals, your time horizon for achieving those goals, and your tolerance for risk.
There are inherent risks in investing in securities Products may be subject to market and other risk factors. It is possible to lose money by investing in securities.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity and may lose value.
TIAA-CREF Individual & Institutional Services, LLC, and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. A periodic investment plan such a dollar cost averaging does not assure a profit or protect against a loss in declining markets.
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