Mutual funds allow diversity of holdings

January 13, 1991

Mutual-fund basics are simple. Rather than pinning all your hopes on a few individual stocks, mutual funds allow you to diversify your holdings into a much larger universe of investments. Also, instead of worrying about what to do with your funds each day, you are in effect hiring investment professionals to make these decisions.

These investment experts accept your money and put it into a pool of investments that they have chosen to meet certain investment goals that have been described in advance to all potential investors.

These descriptions are contained in a financial document, called a prospectus, that the fund must provide you with. The funds are regulated by the U.S. Securities and Exchange Commission, which oversees the kinds of claims and statements that may be made in a prospectus.

Some funds charge a commission fee when you buy shares in the fund and are called "load" funds; others do not charge any such upfront fee and are known as "no-load" funds. (In the industry's rush toward complexity, there are also "low-load" funds. Sigh.)

Funds have minimum initial investments that can range from a few hundred to several thousand dollars; additions to your account can be in smaller sums.

Load funds can be purchased by going through investment brokers. Brokers typically don't deal with no-load funds because there is no financial incentive to do so.

The no-load funds are best purchased directly from the fund, and the purchase usually can be initiated by telephone (most no-load funds have toll-free "800" numbers) and followed up with a personal check for the purchase amount.

"Families" of funds -- multiple funds set up by the same company -- allow you to easily move money in and out of funds with differing investment objectives.

The object of a family of funds is to keep your money in the family by offering you enough investment alternatives to keep you satisfied in up and down markets and as your own investment objectives change.

What you get for your money are shares in the fund's investment holdings. The fund determines the value of these shares by adding up the market value of all its investments and the amount of cash it has on hand.

This total is then divided by the number of shares in the fund to produce what is known as the "net asset value" of each share. This is the figure quoted in mutual-fund listings in newspapers and magazines.

If you invest in a no-load fund, the net asset value is also what you pay for your shares when you buy into the fund; for a load fund, the commission charge is added to the net asset value to produce a per-share purchase price.

It takes money to run a mutual fund, and you will be paying it in the form of fees. Once you're into a fund, regardless of whether it's a load or no-load fund, there are annual management fees to pay, which usually run from about 0.75 percent of assets to 1.50 percent.

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