Investing in equities, even through a mutual fund, involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary, share prices fluctuate with changes in the market value of a fund's portfolio securities, and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. There is no assurance that a fund will meet is stated objective. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.
International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than US investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.
An investment in a fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Types of Mutual Funds
To help you in your selection of mutual funds, this section provides descriptions of the characteristics - such as investment objective and potential for volatility risk of your investment - of various categories of funds. These descriptions are organized by the type of securities purchased by each fund: equities, fixed-income, money market instruments, or some combination of these.
We also present a table which organizes these fund types by how aggressive or conservative they are and by investment objective. Because mutual funds have specific investment objectives such as growth of capital, safety of principal, current income or tax-exempt income, you can select one fund or any number of different funds to help you meet your specific goals. In general, mutual funds fall into three general categories:
Equity Funds invest in shares of common stocks.
- Fixed-Income Funds invest in government or corporate securities which offer fixed rates of return.
- Balanced Funds invest in a combination of both stocks and bonds.
Aggressive Growth Funds
These funds seek to provide maximum growth of capital with secondary emphasis on dividend or interest income They invest in common stocks with a high potential for rapid growth and capital appreciation.
Because they invest in stocks which can experience wide swings up or down, these funds have a relatively low stability of principal. They often invest in the stocks of small emerging growth companies and generally provide low current income because these companies usually reinvest their profits in their businesses and pay small dividends, if any.
Risk of Aggressive Growth Funds:
Aggressive growth funds generally incur higher risks than growth funds in an effort to secure more pronounced growth. These funds may invest in a broad range of industries or concentrate on one or more industry sectors. Some use borrowing, short-selling, options and other speculative strategies to leverage their results.
There is a risk that you could lose all or a portion of your investment in the fund. The value of your investment in the fund will go up and down with the prices of the securities in which the fund invests. The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. This is especially true with respect to equity securities of smaller companies, whose prices may go up and down more than equity securities of larger, more-established companies. Also, since equity securities of smaller companies may not be traded as often as equity securities of larger, more-established companies, it may be difficult or impossible for the fund to sell securities at a desirable price.
Suitability of Aggressive Growth Funds:
Aggressive growth funds are suitable for investors who can afford to assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for investors who must conserve their principal or who must maximize current income.
Growth Funds
Like aggressive growth funds, growth funds generally invest in stocks for growth rather than current income. They are considered more conservative in their approach because they usually invest in established companies to achieve long-term growth. They are not as likely to invest in less stable companies which may provide short-term substantial gains at the risk of substantial declines. Growth funds are more likely to invest in well-established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential. Growth funds provide low current income, but the investor's principal is more stable that it would be in an aggressive growth fund. While the growth potential may be less over the short term, many growth funds have superior long-term performance records.
Risk of Growth Funds:
Although growth funds are more conservative than aggressive growth funds, they are still relatively volatile. There is a risk that you could lose all or a portion of your investment in the fund. The value of your investment in the fund will go up and down with the prices of the securities in which the fund invests. The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions, and market liquidity.
Suitability of Growth Funds:
They are suitable for growth-oriented investors but not investors who are unable to assume risk or who are dependent on maximizing current income from their investments.
International/Global Funds
International funds seek growth through investments in companies outside the United States. Global funds seek growth by investing in securities around the world, including the United States. Both provide investors with another opportunity to diversify their mutual fund portfolio, since foreign markets do not always move in the same direction as the US markets. The best way to invest abroad is through mutual funds, rather than direct investment in a foreign security. Most investors are unfamiliar with foreign investment practices and currencies and may not have a clear understanding of how economic or political events can affect foreign securities. An investor in an international mutual fund doesn't have to worry about trading practices, record keeping, time zones or other laws and customs of a foreign country - that is all handled by the fund's money manager.
International and global funds can invest in common stocks or bonds of foreign firms and governments. Many international funds invest in a particular country or region of the world.
Risk of International/Global Funds:
While international and global funds offer opportunities for growth and diversification, these types of funds do carry some additional risks over funds that invest solely in the US and should be carefully evaluated and selected according to the investor's objectives, time frame and risk profile. These additional risks include, for instance, risks related to fluctuations in the value of the US dollar relative to the value of the other currencies, the custody arrangements made for the Fund's foreign holdings, political risks, differences in accounting procedures, and the lesser degree of public information required to be provided by non-US companies.
Suitability of International/Global Funds:
Because most international and global funds are considered to be aggressive growth funds or growth funds,investors must be willing to assume the risk of potential loss in value in the hope of achieving substantial gains. They are not suitable for investors who must conserve their principal or maximize current income. They may suit you if you:
- are investing for the long-term - at least several years
- are looking for exposure to international markets
- are willing to accept higher risk in exchange for potential long-term growth.
Growth and Income Funds
Growth and income funds seek long-term growth of capital as well as current income. The investment strategies used to reach these goals vary among funds.
Some invest in a dual portfolio consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying high dividends, preferred stocks, convertible securities or fixed-income securities such as corporate bonds and money market instruments. Others may invest in growth stocks and earn current income by selling covered call options on their portfolio stocks.
Risk of Growth and Income Funds:
Growth and income funds have low to moderate stability of principal and moderate potential for current income and growth.
There is a risk that you could lose all or a portion of your investment in the fund and that the income you may receive from the fund may vary. The value of your investment in the fund will go up and down with the prices of the securities in which the fund invests. The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. Interest rate increases may cause the price of a debt security to decrease; the longer a debt security's duration, the more sensitive it is to this risk. The issuer of a security may default or otherwise be unable to honor a financial obligation.
The values of convertible securities in which the fund invests may also be affected by market interest rates, the risk that the issuer may default on interest or principal payments and the value of the underlying stock into which these securities may be converted. Specifically, since these types of convertible securities pay fixed interest or dividends, their values may fall if interest rates rise. Additionally, an issuer may have the right to buy back certain of the convertible securities at a time and at a price that is unfavorable to the fund.
Suitability of Growth and Income Funds:
They are suitable for investors who can assume some risk to achieve growth of capital but who also want to maintain a moderate level of current income.
Fixed-Income Funds
The goal of fixed income funds is to provide high current income consistent with the preservation of capital. Growth of capital is of secondary importance.
Income funds that invest primarily in common stocks are classified as equity income funds (see next listing). Those that invest primarily in bonds and preferred stocks are classified as fixed-income funds. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return.
Since bond prices fluctuate with changing interest rates, there is some risk involved despite the fund's conservative nature. When interest rates rise, the market price of fixed-income securities declines and so will the value of the income funds' investments. Conversely, in periods of declining interest rates, the value of fixed-income funds will rise and investors will enjoy capital appreciation as well as income.
Fixed-income funds offer a higher level of current income than money market funds, but a lower stability of principal.
Risk of Fixed-Income Funds:
They are generally more stable in price than funds that invest in stocks. Within the fixed-income category, funds vary greatly in their stability of principal and in their dividend yields. High-yield funds, which seed to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities.
Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely payment of interest and principal is backed by the full faith and credit of the US Government. These include securities issued by the US Treasury, the Government National Mortgage Association ("Ginnie Mae" securities), the Federal National Mortgage Association ("Fannie Maes")and Federal Home Loan Mortgage Corporation ("Freddie Macs"). All are backed by pools of mortgages.
There is a risk that you could lose all or a portion of your investment in the fund and that the income you may receive from your investment may vary. The value of your investment in the fund will go up and down with the prices of the securities in which the fund invests. Debt securities are particularly vulnerable to credit risk and interest rate fluctuations. Interest rate increases can cause the price of a debt security to decrease; "junk bonds" are less sensitive to this risk than are higher-quality bonds.
Suitability of Fixed-Income Funds:
Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so. Again, carefully read the prospectus to learn if a fund's investment policy with respect to yield and risk coincides with your own objectives.
High-Yield Funds
High yield funds seek a very high yield, but carry a greater risk than corporate bond funds. In turn, high-yield corporate bonds have the potential to produce greater income than government bonds. The majority of their portfolios invested in low-rated corporate bonds.
Risk of High-Yield Funds:
Investing in higher-yielding, lower-rated corporate bonds, commonly known as "junk bonds," has a greater risk of price fluctuation and loss of principal and income than US government securities, such as US Treasury bonds and bills. Compared to higher-quality debt securities, junk bonds involve greater risk of default or price changes due to changes in the credit quality of the issuer and because they are generally unsecured and may be subordinated to other creditors' claims. The value of "junk bonds" often fluctuates in response to company, political or economic developments and can decline significantly over short periods of time or during periods of general or regional economic difficulty. During those times, the bonds could be difficult to value or to sell at a fair price. Credit ratings on junk bonds do not necessarily reflect their actual market risk.
Suitability of High-Yield Funds:
High-yield funds are suitable for investors who want to maximize current income and who can assume a higher degree of capital risk in order to do so. Again, carefully read the prospectus to learn if a fund's investment policy with respect to yield and risk coincides with your own objectives.
Balanced/Equity Income Funds
Equity income funds seek high current yield by investing primarily in equity securities of companies which pay high dividends. Unlike interest payments on bonds, dividends on equity securities can change as companies raise or lower their dividends.
Risk of Balanced/Equity Income Funds:
Since yield-oriented stocks are more volatile than comparably rated fixed-income securities, equity income funds offer less stability of principal than fixed-income funds. Balanced funds are more evenly invested in equities and income securities.
Suitability of Balanced/Equity Income Funds:
Balanced and equity income funds are suitable for conservative investors who want high current yield with some growth.
Money Market Funds: General
For the cautious investor, these funds provide a very high stability of principal while seeking a moderate to high current income. They invest in highly-liquid, virtually risk-free short-term debt securities of agencies of the US Government, banks and corporations and US Treasury Bills. They have no potential for capital appreciation.
Money market mutual funds seek to keep a constant share price of $1.00 per share. Therefore, they are an attractive alternative to bank accounts. Money market fund yields are generally competitive with yields on bank certificates of deposit (CDs). Money market funds also offer several other advantages:
- Money can be withdrawn any time without penalty. (CDs require money to be kept on deposit for a fixed period of time and impose penalties for early withdrawal.) Money market funds also offer check writing privileges.
Although not insured by the FDIC or FSLIC, money market funds invest only in highly-liquid, short-term, top-rated money market instruments. - Money market funds are suitable for conservative investors who want high stability of principal and moderate current income with immediate liquidity.
Money Market Funds: US Government
These funds are highly specialized, investing only in money market instruments whose timely payment of principal and interest is guaranteed or backed by the US Government or its agencies. The added safety of US Government guarantees carries a cost in the form of a slightly lower yield than regular money market funds. These funds also offer check writing.
Suitability of Money Market Funds, US Government:
US Government money market funds are suitable for cautious investors seeking high stability of principal and moderate to high current income with immediate liquidity.
Money Market Funds: Tax-exempt
Tax-exempt money market funds invest in securities that provide safety of principal, liquidity and income exempt from federal income taxes by investing in short-term, high-rated municipal obligations.
Like regular money market funds, the net asset value remains stable and they provide check writing privileges. They differ in that the income earned is exempt from federal income taxes.
Suitability of Money Market Funds, Tax-exempt:
Tax-exempt money market funds are suitable for persons who ordinarily would invest in regular money market funds, but whose marginal income tax bracket is such that their after-tax yield would be higher with the tax-exempt fund. Because tax-exempt money market funds generally pay lower yields than taxable money market funds, investors should compare their after-tax return on both before deciding which type of fund to purchase.
Municipal (Tax-exempt) Bond Funds
"Muni" bond funds provide higher tax-exempt income than tax-exempt money market funds by investing in longer-maturity (and often lower-rated) securities, which generally offer higher yields than the short-term, high-rated securities in which tax-exempt money market funds invest.
Municipal bond funds vary greatly in the quality and maturity of the municipal bonds they invest in. The longer the maturity, the higher the yield. Also, the lower the credit rating of the issuer, the greater the risk and the higher the yield.
While municipal bond funds generally provide lower yields than income funds with debt obligations of similar maturities and ratings, for an investor in a high marginal tax-bracket the after-tax yields of municipal bond funds will be higher.
Risk of Municipal(Tax-exempt) Bond Funds:
The price and yield of municipal bond funds will fluctuate moderately with interest rates. As interest rates decline, the value of principal increases while yield decreases; as rates increase, bond prices decline but yields increase.
There is a risk that you could lose all or a portion of your investment in the fund and that the income you may receive from your investment may vary. The value of your investment in the fund will go up and down with the prices of the securities in which the fund invests. Interest rate increases can cause the price of a debt security to decrease. The longer a debt security's duration, the more sensitive it is to this risk. Junk bonds are less sensitive to this risk than are higher-quality bonds. A municipality may default or otherwise be unable to honor a financial obligation. Private activity bonds are not backed by the taxing power of the issuing municipality.
Suitability of Municipal (Tax-exempt) Bond Funds:
Suitable for investors in medium to higher tax brackets who want current income free from federal income tax.
Double and Triple Tax-exempt Bond Funds
These bond funds provide the investor with an even greater tax advantage by investing in municipal bonds of a single state. Triple tax-exempt funds are exempt from income tax in a specific city. Thus they generate income exempt from not only federal income tax but also from state and/or city income tax for residents of those jurisdictions.
Risk of Double and Triple Tax-exempt Bond Funds:
Like all bond funds, the value of the shares will fluctuate with interest rates, as will the current yield. Also, the stability of principal and yield levels vary with the quality and maturity length of the bonds in which the funds invest. Lack of geographic diversification increases credit risk of these funds compared with national funds.
Suitability of Double and Triple Tax-exempt Bond Funds:
These funds are suitable for investors in medium to high tax brackets in high tax states who want income with maximum exemption from taxes.
Specialty/Sector Funds
These funds invest in securities of a specific industry or sector of the economy such as health care, high technology, leisure, utilities or precious metals.
Because such funds invest primarily in one sector, they do not offer the element of of downside risk protection found in mutual funds that invest in a broad range of industries. However, the funds do enable investors to diversify holdings among many companies within an industry, a more conservative approach than investing directly in one particular company.
Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in favor" but also entail the risk of capital losses when the industry is out of favor.
While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly-diversified portfolio and attempt to mirror the performance of various market averages. Index funds generally buy shares in all the companies composing the S&P 500 Stock Index or other broad stock market indices.
Asset Allocation funds move funds among a variety of markets and instruments in response to the fund manager's view of relative market prospects. They are broadly diversified and sometimes have higher management fees since there may be a variety of securities in the portfolio. While they can invest in a wide variety of the instruments, Social Responsibility funds apply moral and ethical as well as economic principles in the selection of securities.
Risk of Specialty/Sector Funds:
Investing in a single-sector mutual fund may involve greater risk and potential reward than investing in a more diversified fund. A sector fund's focus on one industry exposes it to greater volatility than funds that invest in many different sectors.
Suitability of Specialty/Sector Funds:
Specialty funds are suitable for investors seeking to invest in a particular industry who can monitor industry performance regularly and alter investment strategies accordingly. Investors who can tolerate a moderate to high degree of risk, are seeking capital appreciation and to whom dividend income is secondary in importance would be appropriate for investing in specialty/sector funds. Investors must be willing to assume the risk of potential loss in value of their investment in the hope of achieving substantial gains. They are not suitable for investors who must conserve their principal or maximize current income.
As with any investment, there is risk. For a prospectus containing complete information, contact the fund you are considering or your broker at 1-800-50-PLACE. Read the prospectus carefully before you invest. Past performance is no guarantee of future results. Principal value and investment returns will fluctuate with changes in market conditions. An investor's shares, when redeemed may be worth more or less than their original cost.