No matter what type of investor you are, there is bound to be a mutual fund that fits your style. According to the last count there are more than 10,000 mutual funds in North 
America! That means there are more mutual funds than stocks.

It's important to understand that each mutual fund has different risks and rewards. 
In general, the higher the potential return, the higher the risk of loss. Although some funds 
are less risky than others, all funds have some level of risk - it's never possible to diversify 
away all risk. This is a fact for all investments.

Each fund has a predetermined investment objective that tailors the fund's assets, regions 
of investments and investment strategies. At the fundamental level, there are three 
varieties of mutual funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds

All mutual funds are variations of these three asset classes. For example, while equity funds 
that invest in fast-growing companies are known as growth funds, equity funds that invest 
only in companies of the same sector or region are known as specialty funds.

Let's go over the many different flavors of funds. We'll start with the safest and then work through to the more risky.

Money Market Funds
The money market consists of short-term debt instruments, mostly Treasury bills. This is a 
safe place to park your money. You won't get great returns, but you won't have to worry 
about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).

Bond/Income Funds
Income funds are named appropriately: their purpose is to provide current income on a 
steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and 
"income" are synonymous. 

These terms denote funds that invest primarily in government and corporate debt. While 
fund holdings may appreciate in value, the primary objective of these funds is to provide 
a steady cashflow to investors. As such, the audience for these funds consists of 
conservative investors and retirees.

Bond funds are likely to pay higher returns than certificates of deposit and money market 
investments, but bond funds aren't without risk. Because there are many different types 
of bonds, bond funds can vary dramatically depending on where they invest. For example, 
a fund specializing in high-yield junk bonds is much more risky than a fund that invests 
in government securities. Furthermore, nearly all bond funds are subject to interest rate 
risk, which means that if rates go up the value of the fund goes down.

Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income and capital 
appreciation. The strategy of balanced funds is to invest in a combination of fixed income 
and equities. A typical balanced fund might have a weighting of 60% equity and 40% 
fixed income. The weighting might also be restricted to a specified maximum or minimum 
for each asset class. A similar type of fund is known as an asset allocation fund. Objectives 
are similar to those of a balanced fund, but these kinds of funds typically do not have to 
hold a specified percentage of any asset class. The portfolio manager is therefore given 
freedom to switch the ratio of asset classes as the economy moves through the business 
cycle.

Equity Funds
Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. 
There are, however, many different types of equity funds because there are many different types of equities. 
A great way to understand the universe of equity funds is to use a style box, an example of which is below.

The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. The term value refers to a style of investing that looks 
for high quality companies that are out of favor with the market. These companies are characterized by low P/E and price-to-book ratios and high dividend yields. The opposite 
of value is growth, which refers to companies that have had (and are expected to continue 
to have) strong growth in earnings, sales and cash flow. A compromise between value and growth is blend, which simply refers to companies that are neither value nor growth stocks 
and are classified as being somewhere in the middle.

For example, a mutual fund that invests in large-cap companies that are in strong financial 
shape but have recently seen their share prices fall would be placed in the upper left 
quadrant of the style box (large and value). The opposite of this would be a fund that 
invests in startup technology companies with excellent growth prospects. Such a mutual fund would reside in the bottom right quadrant (small and growth).

Global/International Funds
An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country. It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more volatile 
and have unique country and/or political risks. But, on the flip side, they can, as part 
of a well-balanced portfolio, actually reduce risk by increasing diversification. Although 
the world's economies are becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of your home country.

Specialty Funds
This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. This type of mutual fund forgoes broad diversification to concentrate on 
a certain segment of the economy. 

Sector funds are targeted at specific sectors of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, 
but you have to accept that your sector may tank. 

Regional funds make it easier to focus on a specific area of the world. This may mean 
focusing on a region (say Latin America) or an individual country (for example, only Brazil). 
An advantage of these funds is that they make it easier to buy stock in foreign countries, 
which is otherwise difficult and expensive. Just like for sector funds, you have to accept 
the high risk of loss, which occurs if the region goes into a bad recession. 

Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria 
of certain guidelines or beliefs. Most socially responsible funds don't invest in industries 
such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get 
a competitive performance while still maintaining a healthy conscience.

Index Funds
The last but certainly not the least important are index funds. This type of mutual fund 
replicates the performance of a broad market index such as the S&P 500 or Dow Jones 
Industrial Average (DJIA). An investor in an index fund figures that most managers can't 
beat the market. An index fund merely replicates the market return and benefits investors 
in the form of low fees.

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Mutual Funds: The Costs?
Costs are the biggest problem with mutual funds. These costs eat into your return, and 
they are the main reason why the majority of funds end up with sub-par performance.

What's even more disturbing is the way the fund industry hides costs through a layer of 
financial complexity and jargon. Some critics of the industry say that mutual fund companies 
get away with the fees they charge only because the average investor does not understand what he/she is paying for.

Fees can be broken down into two categories:
1. Ongoing yearly fees to keep you invested in the fund.
2. Transaction fees paid when you buy or sell shares in a fund (loads).

The Expense Ratio
The ongoing expenses of a mutual fund is represented by the expense ratio. This is 
sometimes also referred to as the management expense ratio (MER). The expense ratio 
is composed of the following:

• The cost of hiring the fund manager(s) - Also known as the management fee, this cost 
is between 0.5% and 1% of assets on average. While it sounds small, this fee ensures 
that mutual fund managers remain in the country's top echelon of earners. Think about it 
for a second: 1% of 250 million (a small mutual fund) is $2.5 million - fund managers are definitely not going hungry! It's true that paying managers is a necessary fee, but don't 
think that a high fee assures superior performance.

• Administrative costs - These include necessities such as postage, record keeping, 
customer service, cappuccino machines, etc. Some funds are excellent at minimizing 
these costs while others (the ones with the cappuccino machines in the office) are not.

• The last part of the ongoing fee (in the United States anyway) is known as the 12B-1 
fee. This expense goes toward paying brokerage commissions and toward advertising 
and promoting the fund. That's right, if you invest in a fund with a 12B-1 fee, you are 
paying for the fund to run commercials and sell itself!

On the whole, expense ratios range from as low as 0.2% (usually for index funds) to as 
high as 2%. The average equity mutual fund charges around 1.3%-1.5%. You'll 
generally pay more for specialty or international funds, which require more expertise 
from managers.


In case you are still curious, here is how certain loads work:
• Front-end loads - These are the most simple type of load: you pay the fee when you 
purchase the fund. If you invest $1,000 in a mutual fund with a 5% front-end load, $50 
will pay for the sales charge, and $950 will be invested in the fund.

• Back-end loads (also known as deferred sales charges) - These are a bit more 
complicated. In such a fund you pay the a back-end load if you sell a fund within a 
certain time frame. A typical example is a 6% back-end load that decreases to 0% in the seventh year. The load is 6% if you sell in the first year, 5% in the second year, etc. 
If you don't sell the mutual fund until the seventh year, you don't have to pay the 
back-end load at all.

A no-load fund sells its shares without a commission or sales charge. Some in the mutual 
fund industry will tell you that the load is the fee that pays for the service of a broker 
choosing the correct fund for you. According to this argument, your returns will be 
higher because the professional advice put you into a better fund. There is little to no 
evidence that shows a correlation between load funds and superior performance. In 
fact, when you take the fees into account, the average load fund performs worse than 
a no-load fund. 

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Mutual Funds: How to Pick a Mutual Fund?
Buying and Selling
You can buy some mutual funds (no-load) by contacting the fund companies directly. 
Other funds are sold through brokers, banks, financial planners, or insurance agents. If you 
buy through a third party there is a good chance they'll hit you with a sales charge (load).

That being said, more and more funds can be purchased through no-transaction fee 
programs that offer funds of many companies. Sometimes referred to as a 
"fund supermarket," this service lets you consolidate your holdings and record keeping, 
and it still allows you to buy funds without sales charges from many different companies. 
Popular examples are Schwab's OneSource, Vanguard's FundAccess, and Fidelity's 
FundsNetwork. Many large brokerages have similar offerings.

Selling a fund is as easy as purchasing one. All mutual funds will redeem (buy back) 
your shares on any business day. In the United States, companies must send you 
the payment within seven days.

The Value of Your Fund
Net asset value (NAV), which is a fund's assets minus liabilities, is the value of a mutual 
fund. NAV per share is the value of one share in the mutual fund, and it is the number 
that is quoted in newspapers. You can basically just think of NAV per share as the 
price of a mutual fund. It fluctuates everyday as fund holdings and shares outstanding 
change.When you buy shares, you pay the current NAV per share plus any sales 
front-end load. When you sell your shares, the fund will pay you NAV less any back-end 
load.

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Mutual Funds: How To Read A Mutual Fund Table?

Columns 1 & 2: 52-Week High and Low - These show the highest and lowest prices 
the mutual fund has experienced over the previous 52 weeks (one year). This typically 
does not include the previous day's price.

Column 3: Fund Name - This column lists the name of the mutual fund. The company 
that manages the fund is written above in bold type.

Column 4: Fund Specifics - Different letters and symbols have various meanings. 
For example, "N" means no load, "F" is front end load, and "B" means the fund has both 
front and back-end fees. For other symbols see the legend in the newspaper in which 
you found the table.

Column 5: Dollar Change -This states the dollar change in the price of the mutual fund 
from the previous day's trading.

Column 6: % Change - This states the percentage change in the price of the mutual 
fund from the previous day's trading.

Column 7: Week High - This is the highest price the fund traded at during the past week.

Column 8: Week Low - This is the lowest price the fund traded at during the past week.

Column 9: Close - The last price at which the fund was traded is shown in this column.

Column 10: Week's Dollar Change - This represents the dollar change in the price of 
the mutual fund from the previous week.

Column 11: Week's % Change - This shows the percentage change in the price of 
the mutual fund from the previous week.