Know Your Mutual Funds
Almost 100 million Americans, representing about 44% of U.S. households, owned mutual funds in 2018. Saving for retirement was the primary goal for 73% of investors; other goals included saving for college or a house, building an emergency fund, or providing current income.1
Mutual funds offer a convenient way to participate in a
broad range of market activity that would be difficult for most
investors to achieve by purchasing individual securities.
With almost 8,000 funds available on the U.S. market,
you should be able to find appropriate investments
to pursue your goals.2 However, it's important to
periodically examine the mix of funds you hold.
If you are approaching retirement or already retired,
this may be a good time to assess the risk level and
growth potential of your funds, along with any other
investments in your portfolio. Keep in mind that even
though it is generally wise to reduce risk as you near
retirement, you may also need to pursue long-term
The following overview describes some basic types
of funds in rough order of risk, from lowest to highest.
Investments seeking to achieve higher returns also carry
an increased level of risk.
Money market funds invest in short-term debt
investments such as commercial paper and certificates of deposit and are
typically used as a cash alternative. Although a money
market fund attempts to maintain a stable $1 share
price, you can lose money by investing in such a fund.
Money market funds are neither insured nor guaranteed
by the FDIC or any other government agency.
Municipal bond funds generally offer income that
is free of federal income tax and may be free of state
income tax if the bonds in the fund were issued from
your state. Although interest income from municipal bond
funds may be tax exempt, any capital gains are subject to tax. Income for some investors may be subject to state
and local taxes and the federal alternative minimum tax.
Income funds concentrate their portfolios on bonds,
Treasury securities, and other income-oriented securities,
and may also include stocks that have a history of paying
Balanced funds, hybrid funds, and growth and
income funds seek the middle ground between growth
funds and income funds. They include a mix of stocks
and bonds and seek to combine moderate growth
potential with modest income.
Growth funds invest in the stock of companies with
a high potential for appreciation but low emphasis on
income. They are more volatile than many types of funds.
Global funds invest in a combination of domestic and
foreign securities. International funds invest primarily in
foreign stock and bond markets, sometimes in specific
regions or countries. There are increased risks associated
with international investing, including differences in
financial reporting, currency exchange risk, economic
and political risk unique to a specific country, and
greater share price volatility.
Sector funds invest almost exclusively in a particular
industry or sector of the economy. Although they offer
greater appreciation potential, the volatility and risk level
are also higher because they are less diversified.
Aggressive growth funds aim for maximum growth.
They typically distribute little income, have very high
growth potential, tend to be more volatile, and are
considered to be very high risk.
Bond funds (including funds that contain both stocks and bonds) are subject to the interest rate, inflation, and credit risks associated with the underlying bonds in the fund. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. Dividends are not guaranteed.
Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. Mutual fund shares, when sold, may be worth more or less than their original cost.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1-2) Investment Company Institute, 2018