Mutual funds offer the opportunity for a number of investors, who share a similar investment objective, to pool their money and have it invested and managed by professional investment managers. The managers invest in stocks, bonds, or other securities for a fund’s portfolio. When you buy shares in a mutual fund you get a stake in its portfolio of investments.
Some mutual funds invest in stocks, others in bonds. Some mutual funds invest in both. Stock mutual funds tend to specialize by region, industry sector or the market cap of the companies they invest in. Bond mutual funds can be divided into taxable and tax-free. Additionally they specialize by region, credit rating, duration, and whether they invest in corporate or government bonds.
A mutual fund offers a number of characteristics that differ from investing in individual securities; they include:
Mutual funds offer investors access to full time, professional money managers who have the expertise, experience and resources to actively buy, sell, and monitor investments.
Initial investments in most funds are reasonable, and the requirement for additional investments is usually even lower. Many funds require as little as $1,000 for initial investments and only a $50 minimum for subsequent investments.
An investment in a mutual fund generally includes a number of different securities. For example, diversified equity fund portfolios usually hold stocks representing different companies, different industries and sometimes even different nations. Diversification can help reduce the financial risk inherent in investing. If one investment decreases in value, another investment in the portfolio may increase.
Many mutual funds are part of a “family of funds,” which means that as your investment objectives change, you can exchange shares from one fund to another in the same family at little or no cost. For example, Franklin Templeton Investments offers more than 110 Franklin, Templeton and Franklin Mutual Series funds to help meet an investor’s financial goals.
It’s easy to withdraw some or all of the money you’ve invested. Typically, you can get your money within one week. Of course, the value of shares, when redeemed, may be worth more or less than their original cost.
Front-end and, in some cases, back-end sales loads, management fees, Rule 12b-1 fees and other expenses are associated with Franklin Templeton mutual fund investments. Investors’ returns are reduced by these fees and expenses. Funds are offered through prospectuses, which contain detailed information about a fund’s goals, charges, expenses and risks. They should be read carefully before investing.
Increased Net Asset Value (NAV)
If the market value of a fund's portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. A higher NAV reflects the higher value of your investment. Of course, the value of shares you redeem may be more or less than you originally paid for them.
A mutual fund may earn income through dividends and interest on the securities in its portfolio. It then pays shareholders nearly all of the income (minus expenses) it has earned in the form of dividends.
Capital Gain Distributions
When a mutual fund sells a security in its portfolio that has increased in price, it has a capital gain. At the end of the year, the fund distributes these capital gains (minus any capital losses) to investors.
Mutual funds will usually give you a choice regarding dividend and capital gain distributions: They can send you a check, or you can have your distributions reinvested to buy more shares (often without paying an additional sales load).