Section One

An Investor’s Guide to Mutual Funds

Mutual funds are designed to make life easier for investors. Funds give savers of even modest means access to top-quality investment management combined with a high level of convenience and service, all at a reasonable price.

Since the mission of funds is to serve investors, we start this book by taking a look at mutual funds from an investor’s perspective. We give an overview of mutual funds by focusing on four critical questions:

1. Why invest through mutual funds?

2. How do mutual funds work?

3. How do investors research a potential mutual fund purchase?

4. How do investors choose a mutual fund that’s right for them?

This section has four chapters:

Chapter 1 provides an introduction to investing through mutual funds. It reviews their advantages and disadvantages, summarizes their history, and discusses how they are used by investors today. It concludes by providing an overview of the entities that work to ensure that funds meet their obligations to investors: the government regulators and the industry associations.

Chapter 2 describes the basic structure and operations of a mutual fund. It begins with a discussion of two key fund features: daily liquidity at net asset value and pass-through tax status. It explains how funds operate through contracts with service providers supervised by a board of directors, and it discusses the ethical standards that apply to fund managers. Finally, it compares mutual funds to alternative methods of investing, either directly in securities or through other commingled investment vehicles.

Chapter 3 explains how investors can learn about potential mutual fund investments through information provided by the funds themselves. It begins with a review of the principle of disclosure. It then focuses on the summary prospectus of a mutual fund and then continues with an overview of the other parts of the prospectus and of the shareholder reports. It ends with a discussion of how investors can use this information to select mutual funds.

Chapter 4 discusses how investors might go about choosing a mutual fund. It places funds in the context of a personal financial plan, and then explains the various approaches to evaluating fund performance results. It next reviews each type of mutual fund and ends with a discussion of the factors investors should consider when choosing a funds in that category.