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Mutual fund basics

Jeffrey Apps and Tracy Tutag

It was quite a year for the mutual fund industry and, while consumers are concerned about mutual funds, a number of investors are returning to the mutual fund marketplace. You may be one of those investors, seeking the potential for higher rates of return or, perhaps you have invested in mutual funds for many years. In either case, the back-to-basics discussion of mutual fund investing may benefit you. What is a mutual fund?A mutual fund pools the assets of people seeking similar investment objectives. By joining the “pool”, these individuals’ own “shares” of the fund in proportion to the amount they invest. Each investor has a partial interest in each of the fund’s underlying investments and shares in the potential profits. Professional money managers invest this pool of money in a variety of stocks, bonds or other securities that are consistent with the fund’s stated objective, such as growth or tax-exempt income.By investing in mutual funds, individuals can enjoy a level of diversification and professional money management they may otherwise find difficult to achieve. Diversification, or owning a wide assortment of securities in various industries and companies, can help protect against large losses. The reason being that, even if some securities falter, others in the mutual fund may perform well. In addition, the full-time professional management in most funds appeals to investors because many people lack the time, knowledge or commitment to manage their own portfolio.Which mutual fund is right for me?Usually mutual funds are characterized by their investment objective. Growth funds offer the potential of capital appreciation by investing in companies that are positioned for strong earnings growth. Because growth funds have a higher degree of risk, they are often considered longer-term investments. Income funds are usually less risky and designed to provide steady income by investing in companies with solid records of dividend payments. Investors who desire both current income and capital gains can invest in balanced funds. Specialty funds typically concentrate their holdings in a specific industry (such as health care) or geographic area. The objective of a particular mutual fund often affects its risk level. Typically, the higher the return sought, the more risk a fund manager takes in the investments and that risk is passed on to the investor. Potential returns for the more conservative funds may be lower than those of the more aggressive funds.How do I make money?Investors can make money from mutual funds in basically three ways: dividend income, capital gain distributions and growth in capital. Dividend income payments are dividends and interest earned on the fund’s investments. Capital gain distributions are payments made from any profits realized on the sale of securities held by the fund. Growth in capital occurs if the fund’s underlying investments increase in value, and investors sell their fund shares at a price higher than the purchase price.Of course, investors can lose money if the fund managers are not successful with their investments. There is no guarantee that investment objectives will be achieved. Also, it is important to realize that mutual funds are not federally insured (even if so ld through a bank), although certain types of funds invest in securities that are insured. Based on the fund’s investment objective, other more specific risks may arise. Funds that concentrate their holdings in a specific industry, called ‘sector funds’ can be vulnerable to any single economic, political, or regulatory development. Funds concentrating their holdings in a certain geographic area, or international funds, can be vulnerable to currency exchange fluctuation, different government regulations, economic conditions and accounting standards.Before investing in any mutual fund, consider your goals, risk profile and investment time horizon. Ask for the fund’s prospectus and read it carefully before investing. Mutual funds are offered through AXA Advisors, LLC.Jeffrey Apps and Tracy Tutag offer securities and investment advisory services through AXA Advisors, LLC (member NASD, SIPC) 1290 Avenue of the Americas, New York, NY 212-314-4600 and offers annuity and insurance products through an insurance brokerage affiliate, AXA Network, LLC and its subsidiaries. They can be reached at 926.0601 or tracy.tutag@axa-advisors.comVail, Colorado


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