The following is an excerpt from Forbes.com, by S. Wade Hansen, 8/23/06
Mutual Funds 101
Definition: As defined by the Securities and Exchange Commission, a mutual fund is “a company that brings together money from many people and invests it in stocks, bonds or other assets.” In other words, a mutual fund is like a basket that holds assets, like stocks. The mutual fund owns the individual stocks or bonds. When you buy a mutual fund, you purchase a piece of that basket. While you do not own the individual assets themselves, they are important, because the value of the mutual fund is based on the value of the assets it holds.
Benefits: Mutual funds offer two key benefits: diversification and professional management.
Mutual funds offer instant diversification because each fund, or basket, owns multiple stocks, bonds, and so on.
Professional management means that somebody who spends a lot more time analyzing financial markets than you do will be helping you invest your money.
Classifications: The broad classifications of mutual funds include Specialty, International, Small Companies, Mid-size Companies, Large Companies, Bonds and Money Markets. Within each of these classifications there are more specific options.
Expenses: Every mutual fund has expenses. The three fees that you should always identify are loads, redemption fees and operating expenses.
Loads are fees that can be charged when you buy a mutual fund (front-end load) or when you sell a mutual fund (back-end load). Some mutual funds do not charge a load, which is known as a ‘no load' fund.
Redemption fees are stipulations indicating that if you sell your mutual fund before a certain date, you will be charged a fee. Fund companies impose redemption fees to discourage “day trading” of the mutual fund.
Operating expenses-management fees-12(b) 1 fees-are charged as a normal part of doing business. Management fees pay the manager for his experience and time. 12(b) 1 fees cover advertising and distribution expenses for the fund.
