Mutual Funds

MUTUAL FUNDS
Mutual Fund, form of management-investment company that combines the money of its shareholders and invests those funds in a wide variety of stocks, bonds, and so-called money market instruments. The latter include short-term investments such as United States Treasury bills and other federal securities, commercial paper, and bank certificates of deposit. Mutual funds provide the investor with professional management of funds and diversification of investment among the securities offered by leading corporations, federal and state governments, and other entities.

TYPE OF MUTUAL FUNDS
Most mutual funds are classed as open-end funds, meaning that the fund will redeem outstanding shares immediately upon request. Thus, the number of shares of a given mutual fund is not fixed, but fluctuates as new shares are sold to investors and outstanding shares are redeemed. The offering price and redemption price of an open-end fund are based on the market value of the securities in its portfolio. In addition, varying charges, called loads, may be applied. The offering price may include a front-end load, generally to cover the commission to the broker or other sales representative. A back-end load may be subtracted from the redemption price, often at a rate that progressively decreases the longer the shares are held.

Closed-end funds generally have a fixed number of shares outstanding and are traded on the over-the-counter market or, in some instances, on stock exchanges. Shares are purchased and sold at the market price plus a commission. They may sell at a premium, that is, above the value of their assets, or at a discount, below the value of their assets.

OBJECTIVES
Mutual funds are classed according to their investment objectives. Broadly stated, funds seek growth of capital, or stability (or safety) of capital, or current income. Within these classifications lies a multitude of variations. Money-market funds, which many investors look upon as an alternative to a bank account, seek complete safety of capital in short-term investments. Yields vary, being loosely linked with the interest rate paid on U.S. Treasury bills. There is a rapid flow of cash into and out of money-market funds. At the other end of the scale, aggressive growth funds seek high returns by investing in promising but speculative securities. These funds entail greater risk than standard growth funds, which tend to invest in larger, more financially secure companies with records of steadily increasing earnings. Growth-and-income funds attempt to achieve a balance between the two. Among funds that seek stability and safety, some may invest in high-quality bonds, others in blue-chip stocks, and still others in federal securities, which are backed by the full faith and credit of the U.S. government. Funds that aim for current income may be speculative, investing in high-yield, high-risk securities such as junk bonds, or conservative in outlook, investing in low-risk securities with a good record of paying dividends. Between the extremes are funds that are willing to take some risk for higher returns but are mindful of the need to conserve capital. In general, younger investors, with most of their earning power ahead of them, can tolerate more risk than investors who are close to retirement.

Balanced funds, seeking both growth and income, may invest in stocks, bonds, and other financial instruments. Sector funds put all their funds in corporations in one area of business, such as the automobile industry, or in one country or region of the world. International stock funds and bond funds, gold and precious metals funds, and municipal bond funds are among the dozens of other categories and subcategories. In contrast to the extreme specialization offered by some funds, there are fully managed mutual funds, which are free by company policy to alter the composition of the portfolio according to the management's evaluation of the current market. Another approach is offered by index funds, which do not attempt to outguess the markets but simply structure their portfolios to duplicate one of the major stock market indexes, such as the Standard and Poor's index of 500 leading stocks.

METHODS OF DISTRIBUTION
Open-end mutual funds may be sold by securities dealers and brokers, by financial planners, by a sales staff employed by the fund management, or directly by the fund to the investor. The last-named process carries no sales charge, or a low one, and such funds are called no-load or low-load. All funds have management fees regardless of distribution methods.

SHAREHOLDERS' RIGHT
Owners of shares in mutual funds receive investment income dividends derived from dividends and interest earned on securities in the portfolio. Capital gains distributions are made when and if long-term gains are realized on the sale of securities in the portfolio. Income dividends are paid quarterly or semiannually; capital gains distributions are usually made annually, toward the end of the fiscal year of the fund.

A variety of services are offered to shareholders by mutual funds. Most funds provide accumulation plans, in which investors may buy shares at regular intervals, have dividends reinvested automatically, and accept capital gains distributions in additional shares. A few mutual funds offer contractual plans wherein the shareholder agrees to invest a certain amount each month. Many financial institutions offer a so-called family of open-end mutual funds, allowing investors to divide their savings among funds with varying objectives but managed by the same sponsor and to switch from one fund to another at little or no cost. A number of funds also offer withdrawal plans, under which shareholders may receive payments from their investment at regular intervals while income dividends and capital gains are routinely reinvested.

Mutual funds are regulated by federal and state laws. The principal federal statutes are the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. Most states have laws regulating the organization of investment companies, and the funds are further governed by statutes covering the sale of securities by brokers and dealers.