Identification

• Mutual funds are large pools of capital created by combining the investments of a number of individuals. The money is invested in a portfolio of securities based on the strategies and goals of the particular fund, with investment decisions made by a professional fund manager. The price of shares in a mutual fund is determined by dividing the net asset value (NAV) of the fund by the number of shares outstanding.
  
  

Types

• Some mutual funds are "growth funds." Most growth funds invest in company stocks that the fund manager expects to grow in value. Other mutual funds are income funds designed to appeal to investors seeking low-risk income rather than equity growth. Income funds are typically invest in bonds and conservative stocks that pay high dividends. Some mutual funds specialize in other ways by concentrating in a specific area like foreign companies or socially responsible firms.
  
  

Expense Ratio

• A mutual fund's operating expenses, including management salaries and administrative costs, are summarized by the expense ratio. The expense ratio is the percentage of a fund's assets that go toward covering these costs each year. Transaction costs--fees for buying shares of a stock, for example--are not included in the expense ratio. Some funds do include some or all of their marketing costs as a "12b-1 fee." For the investor, comparing the expense ratio is a good tool to assess how well the fund is managed compared with its earnings performance.
  
  

Loads

• In addition to the expense ratio, some mutual funds charge loads. A load is a sales commission paid to brokers or financial advisers for promoting the fund. The load is paid out of the money you invest, up-front when you buy shares or later when you liquidate your investment. According to Michael Weiss, CFA ("The Lowdown on No-Load Mutual Funds") the evidence shows returns on load funds are no better than for no-load funds, if as good.
  
  

Prospectus

• Any investor considering investing in a mutual fund should obtain and read the fund prospectus. This document is required by the Securities and Exchange Commission and discloses details of the funds operation. The prospectus includes the fund's performance history for the past 10 years, all fees (including the expense ratio and loads) and information about the fund manager and investing philosophy. The prospectus is usually available for download on the fund's website. If not, you can contact your broker or the fund, and request a copy.
  
  

Money Market Funds

• Many people have money market accounts that pay better interest than regular savings and allow you to write a limited number of checks as long as you maintain a minimum balance. The money you deposit goes into a special type of mutual fund that invests only in short-term government or corporate bonds with average maturities of 90 days or less. As of 2008 most money market accounts at banks or credit unions were federally insured. Those offered by investment houses are not insured. Although they are generally considered low-risk investments, occasionally a money market fund does run into trouble and the share price may fall below the standard $1 par value.