Establishing realistic financial goals is an essential first step toward successful investing. Understanding the investments best suited to helping you achieve your goals is equally important.

Most Americans invest to meet long-term goals, such as ensuring a secure retirement or paying for a child’s college education, but many also have more immediate goals, like making a down payment on a home or automobile.

Mutual funds can fit well into either your long- or short-term investment strategy, but the success of your plan depends on the type of fund you choose. Because all funds invest in securities markets, it is crucial to maintain realistic expectations about the performance of those markets and choose funds best suited to your needs.

To The Reader:
The Investment Company Institute is pleased to bring you A Guide to Understanding Mutual Funds. This guide, one of several in the Institute’s Investor Awareness Series, is intended to explain mutual funds and the  basic principles of investing.

During the past decade, interest in—and information about—investing 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 benefited 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 first fund was offered in 1924: professional management— the security of knowing your money is managed by a team of professionals devoted to reaching your investment objectives—and diversification —the 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 benefits 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 or write for a catalogue of additional investor awareness materials at ICI Investor Awareness Campaign, P.O. Box 27849, Washington, DC 20038-7850.

Matthew P. Fink
President, Investment Company Institute

Download A Guide to Understanding Mutual Funds

PDF format, 722KB, 50Pages.

Investment Company Institute
1401 H Street, NW, Suite 1200
Washington, DC 20005-2148
202/326-5800
www.ici.org

CONTENTS
Introduction
About Mutual Funds
What Is a Mutual Fund? ..............................6
Why Invest in a Mutual Fund? ....................7
Stock Funds ................................................9
Bond Funds ..............................................10
Money Market Funds ................................13
Investing Internationally ............................14
How Mutual Funds Are Structured ............16
Other Types of Investment Companies ......17
Establishing an Investment Plan
Establishing Goals and
Realistic Expectations ............................18
Three Common Investment Goals ............20
Figuring Out Your Retirement Needs ........21
Dollar-cost Averaging ................................22
Establishing Realistic Expectations About
Performance ........................................23
The Risk of Inflation ................................25
The Annual Review ..................................26
Tax Considerations ....................................27
Becoming an Informed Investor
The Mutual Fund Prospectus and
Shareholder Reports ..............................30
Publications and Websites ..........................32
How to Read a Mutual Fund Fee Table ......33
Should Fund Fees Affect Your Decision? ....36
Protecting Investors—
Who Oversees Mutual Funds? ..............37
Other Resources
Useful Addresses ........................................40
Questions About Business Practices ............42
Glossary of Mutual Fund Terms..................44

What Is a Mutual Fund?
A mutual fund is a company that invests in a diversified portfolio of securities. People who buy shares of a mutual fund are its owners or shareholders. Their investments provide the money for a mutual fund to buy securities such as stocks and bonds.

A mutual fund can make money from its securities in two ways: a security can pay dividends or interest to the fund, or a security can rise in value. A fund can also lose money and drop in value.

Different Funds, Different Features
There are three basic types of mutual funds—stock (also called equity), bond, and money market. Stock mutual funds invest primarily in shares of stock issued by U.S. or foreign companies. Bond mutual funds invest primarily in bonds.

Money market mutual funds invest mainly in short-term securities issued by the U.S. government and its agencies, U.S. corporations, and state and local governments.

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