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Understanding Mutual Funds

Understanding Mutual Funds

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a guide to
Understanding Mutual Funds
A mutual fund is a type of investment company that invests
in a diversified portfolio of bonds.
The Investment Company Institute is pleased to bring you A Guide to Understanding
Mutual Funds. This guide, one of several in the Institute\u2019s Investor Awareness Series, is
intended to explain mutual funds and the basic principles of investing.

During the past decade, interest in\u2014and information about\u2014investing 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 bene\ufb01ted 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 \ufb01 rst fund was offered in 1924: professional management\u2014
the security of knowing your money is managed by a team of professionals devoted
to reaching your investment objectives\u2014and diversi\ufb01cation\u2014the 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 bene\ufb01ts of funds and investing, and help you set realistic goals and expectations. If you would like to learn more, please visit our website at www.ici.org.

Paul Schott Stevens
President, Investment Company Institute
To The Reader
Introduction...............................................................................................................................................2
About Mutual Funds.................................................................................................................................3

What Is a Mutual Fund?...................................................................................................................3 Why Invest in a Mutual Fund?.......................................................................................................... 4 Stock Funds.......................................................................................................................................6 Bond Funds........................................................................................................................................7 Money Market Funds.........................................................................................................................9 Investing Internationally..................................................................................................................10 How Mutual Funds Are Structured.................................................................................................10 Other Types of Investment Companies.............................................................................................11

Establishing an Investment Plan............................................................................................................12

Establishing Goals and Realistic Expectations..................................................................................12 Three Common Investment Goals....................................................................................................13 Figuring Out Your Retirement Needs..............................................................................................14 Dollar-Cost Averaging........................................................................................................................15 Establishing Realistic Expectations About Performance..................................................................16 The Risk of In\ufb02ation........................................................................................................ ..................17 The Annual Review..........................................................................................................................18 Tax Considerations............................................................................................................................18

Becoming an Informed Investor.............................................................................................................21

The Mutual Fund Prospectus and Shareholder Reports..................................................................21 Publications and Websites...............................................................................................................22 How to Read a Mutual Fund Fee Table............................................................................................23 Should Fund Fees Affect Your Decision?..........................................................................................24 Protecting Investors\u2014Who Oversees Mutual Funds?......................................................................26

Other Resources......................................................................................................................................29

Useful Addresses...............................................................................................................................29 Questions About Business Practices..................................................................................................31 Glossary of Mutual Fund Terms................................................................................................. .......32

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