Mutual Fund

What is a Mutual Fund

A mutual fund is an investment vehicle made up of a pool of money collected from many investors
for the purpose of investing in securities such as stocks, bonds, money market instruments and
other assets. Mutual funds are operated by professional money managers, who allocate the fund's
investments and attempt to produce capital gains and/or income for the fund's investors. A
mutual fund's portfolio is structured and maintained to match the investment objectives stated in
its prospectus.

An Introduction To Mutual Funds

BREAKING DOWN Mutual Fund

Mutual funds give small or individual investors access to professionally managed portfolios
of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in
the gains or losses of the fund. Mutual funds invest in a wide amount of securities, and
performance is usually tracked as the change in the total market cap of the fund, derived by
aggregating performance of the underlying investments.

Mutual fund units, or shares, can typically be purchased or redeemed as needed at the fund's
current net asset value (NAV) per share, which is sometimes expressed as NAVPS. A fund's NAV is
derived by dividing the total value of the securities in the portfolio by the total amount of shares
outstanding.

More on Mutual Funds

A mutual fund is both an investment and an actual company. This may seem strange, but it is
actually no different than how a share of AAPL is a representation of Apple, Inc. When an investor
buys Apple stock, he is buying part ownership of the company and its assets. Similarly, a mutual
fund investor is buying part ownership of the mutual fund company and its assets. The difference
is Apple is in the business of making smartphones and tablets, while a mutual fund company is in
the business of making investments.

Mutual funds pool money from the investing public and use that money to buy other securities,
usually stocks and bonds. The value of the mutual fund company depends on the performance of
the securities it decides to buy. So when you buy a share of a mutual fund, you are actually buying
the performance of its portfolio.

The average mutual fund holds hundreds of different securities, which means mutual fund
shareholders gain important diversification at a very low price. Consider an investor who just buys
Google stock before the company has a bad quarter. They stand to lose a great deal of value
because all of their dollars are tied to one company. On the other hand, a different investor may
buy shares of a mutual fund that happens to own some Google stock. When Google has a bad
quarter, they only lose a fraction as much because Google is just a small part of the fund's
portfolio.
Looking for the right mutual fund? Find out which broker offers the best mutual fund screener by
reading Investopedia's broker reviews.

How Mutual Fund Companies Work

Mutual funds are virtual companies that buy pools of stocks and/or bonds as recommended by
an investment advisor and fund manager. The fund manager is hired by a board of directors and is
legally obligated to work in the best interest of mutual fund shareholders. Most fund managers
are also owners of the fund, though some are not.

There are very few other employees in a mutual fund company. The investment advisor or fund
manager may employ some analysts to help pick investments or perform market research. A
fund accountant is kept on staff to calculate the fund's net asset value (NAV), or the daily value of
the mutual fund that determines if share prices go up or down. Mutual funds need to have
a compliance officer or two, and probably an attorney, to keep up with government regulations.

Most mutual funds are part of a much larger investment company apparatus; the biggest have
hundreds of separate mutual funds. Some of these fund companiesare names familiar to the
general public, such as Fidelity Investments, the Vanguard Group, T. Rowe Price and Oppenheimer
Funds.

Kinds of Mutual Funds

Mutual funds are divided into several kinds of categories, representing the kinds of securities the
mutual fund manager invests in.

One of the largest is the fixed income category. A fixed income mutual fund focuses on
investments that pay a fixed rate of return, such as government bonds, corporate bonds or
other debt instruments. The idea is the fund portfolio generates a lot of interest income, which
can then be passed on to shareholders.

Another group falls under the moniker "index funds." The investment strategy is based on the
belief that it is very hard, and often expensive, to try to consistently beat the market. So the index
fund manager simply buys stocks that correspond with a major market index such as the S&P 500
or the Dow Jones Industrial Average. This strategy requires less research from analysts and
advisors, so there are fewer expenses to eat up returns before they are passed on to shareholders.
These funds are often designed with cost-sensitive investors in mind.

If an investor seeks to gain diversified exposure to the Canadian equity market, he can invest in
the S&P/TSX Composite Index, which is a mutual fund that covers 95% of the Canadian equity
market. The index is designed to provide investors with a broad benchmark index that has the
liquidity characteristics of a narrower index. The S&P/TSX Composite Index is comprised largely of
the financials, energy and materials sectors of the Canadian stock market, with sector allocations
of 35.54%, 20.15% and 14.16%, respectively. Performance of the fund is tracked as the percentage
change to its overall adjusted market cap.

Balanced funds invest in both stocks and bonds with the aim of reducing risk of exposure to one
asset class or another. Another name for this type is "asset allocation fund." An investor may
expect to find the allocation of these funds among asset classes relatively unchanging, though it
will differ among funds. Though their goal is asset appreciation with lower risk, these funds carry
the same risk and are as subject to fluctuation as other classifications of funds.

Other common types of mutual funds are money market funds, sector funds, equity funds,
alternative funds, smart-beta funds, target-date funds and even funds-of-funds, or mutual funds
that buy shares of other mutual funds.

Mutual Fund Fees

In mutual funds, fees are classified into two categories: annual operating fees and shareholder
fees. The annual fund operating fees are charged as an annual percentage of funds under
management, usually ranging from 1-3%. The shareholder fees, which come in the form
of commissions and redemption fees, are paid directly by shareholders when purchasing or selling
the funds.

Annual operating fees are collectively as the expense ratio. A fund's expense ratio is the
summation of its advisory fee or management fee and its administrative costs. Additionally, sales
charges or commissions can be assessed on the front-endor back-end, known as the load of a
mutual fund. When a mutual fund has a front-end load, fees are assessed when shares are
purchased. For a back-end load, mutual fund fees are assessed when an investor sells his shares.

Sometimes, however, an investment company offers a no-load mutual fund, which doesn't carry
any commission or sales charge. These funds are distributed directly by an investment company
rather than through a secondary party.

Some funds also charge fees and penalties for early withdrawals.

Clean Share Mutual Funds

If you want to get the biggest bang for your buck, you might consider mutual funds with 'clean
shares,' a relatively new class of mutual fund shares developed in response to the U.S. Department
of Labor’s fiduciary rule. According to a recent Morningstar Inc. report, clean shares could save
investors at least 0.50% in returnsas compared to other mutual fund offerings. Even better,
investors could enjoy an extra 0.20% in savings, as their advisors will now be tasked with
recommending funds that are in investors' best interests, according to the report.

Clean shares were designed, along with low-load T shares and a handful of other new share
classes, to meet fiduciary-rule goals by addressing problems of conflicts of interest and
questionable behavior among financial advisors. In the past some financial advisors have been
tempted to recommend more expensive fund options to clients to bring in bigger commissions.
Currently, most individual investors purchase mutual funds with A shares through a broker. This
purchase includes a front-end load of up to 5% or more, plus management fees and ongoing fees
for distributions, also known as 12b-1 fees. To top it off, loads on A shares vary quite a bit, which
can create a conflict of interest. In other words, advisors selling these products may encourage
clients to buy the higher-load offerings.

Clean shares and the other new classes eliminate this problem, by standardizing fees and loads,
enhancing transparency for mutual fund investors. “As the Conflict-of-Interest Rule goes into
effect, most advisors will likely offer T shares of traditional mutual funds … in place of the A shares
they would have offered before,” write report co-authors Aron Szapiro, Morningstar director of
policy research, and Paul Ellenbogen, head of global regulatory solutions. “This will likely save
some investors money immediately, and it helps align advisors’ interests with those of their
clients.”

For example, an investor who rolls $10,000 into an individual retirement account (IRA) using a T
share could earn nearly $1,800 more over a 30-year period as compared to an average A-share
fund, according to the analysis. The report also states that the T shares and clean shares compare
favorably with “level load” C shares, which generally don’t have a front-end load but carry a 1%
12b-1 annual distribution fee.

Good as the T shares are, clean shares are even better: They provide one uniform price across the
board and do not charge sales loads or annual 12b-1 fees for fund services. American Funds, Janus
and MFS are all fund companies currently offering clean shares.

Advantages of Mutual Funds

Diversification: Diversification, or the mixing of investments and assets within a portfolio to

reduce risk, is one of the advantages to investing in mutual funds. Buying individual company
stocks in retail and offsetting them with industrial sector stocks, for example, offers some
diversification. But a truly diversified portfolio has securities with different capitalizations and
industries, and bonds with varying maturities and issuers. Buying a mutual fund can achieve
diversification cheaper and faster than through buying individual securities.

Economies of Scale: Mutual funds also provide economies of scale. Buying one spares the investor
of the numerous commission charges needed to create a diversified portfolio. Buying only one
security at a time leads to large transaction fees, which will eat up a good chunk of the investment.
Also, the $100 to $200 an individual investor might be able to afford is usually not enough to buy
a round lotof a stock, but it will buy many mutual fund shares. The smaller denominations of
mutual funds allow investors to take advantage of dollar cost averaging.

Easy Access: Trading on the major stock exchanges, mutual funds can be bought and sold with
relative ease, making them highly liquid investments. And, when it comes to certain types of
assets, like foreign equities or exotic commodities, mutual funds are often the most feasible way –
in fact, sometimes the only way – for individual investors to participate.

Professional Management: Most private, non-institutional money managers deal only with high
net worth individuals – people with six figures (at least) to invest. But mutual funds are run by
managers, who spend their days researching securities and devising investment strategies. So
these funds provide a low-cost way for individual investors to experience (and hopefully benefit
from) professional money management.

Individual-Oriented: All these factors make mutual funds an attractive options for younger, novice
and other individual investors who don't want to actively manage their money: They offer high
liquidity; they are relatively easy to understand; good diversification even if you do not have a lot
of money to spread around; and the potential for good growth. In fact, many Americans already
invest in mutual funds through their 401(k) or 403(b) plans. In fact, the overwhelming majority of
money in employer-sponsored retirement plans goes into mutual funds.
Style: Investors have the freedom to research and select from managers with a variety of styles
and management goals. For instance, a fund manager may focus
on value investing, growth investing, developed markets, emerging markets, income
or macroeconomic investing, among many other styles. One manager may also oversee funds that
employ several different styles.

Disadvantages of Mutual Funds

Fluctuating Returns: Like many other investments without a guaranteed return, there is always
the possibility that the value of your mutual fund will depreciate. Equity mutual funds experience
price fluctuations, along with the stocks that make up the fund. The Federal Deposit Insurance
Corporation (FDIC) does not back up mutual fund investments, and there is no guarantee of
performance with any fund. Of course, almost every investment carries risk. But it's especially
important for investors in money market funds to know that, unlike their bank counterparts, these
will not be insured by the FDIC.

Cash: As you know already, mutual funds pool money from thousands of investors, so every day
people are putting money into the fund as well as withdrawing it. To maintain the capacity to
accommodate withdrawals, funds typically have to keep a large portion of their portfolios in cash.
Having ample cash is great for liquidity, but money sitting around as cash is not working for you
and thus is not very advantageous.

Costs: Mutual funds provide investors with professional management, but it comes at a cost –
those expense ratios mentioned earlier. These fees reduce the fund's overall payout, and they're
assessed to mutual fund investors regardless of the performance of the fund. As you can imagine,
in years when the fund doesn't make money, these fees only magnify losses.

Diworsification: Many mutual fund investors tend to overcomplicate matters – that is, they
acquire too many funds that are highly related and, as a result, don't get the risk-reducing benefits
of diversification; in fact, they have made their portfolio more exposed, a syndrome called
diworsification. At the other extreme, just because you own mutual funds doesn't mean you are
automatically diversified. For example, a fund that invests only in a particular industry sector or
region is still relatively risky.

Lack of Transparency: One thing that can lead to diworsification is the fact that a fund's purpose
or makeup isn't always clear. Fund advertisements can guide investors down the wrong path.
The Securities and Exchange Commission (SEC) requires that funds have at least 80% of assets in
the particular type of investment implied in their names; how the remaining assets are invested is
up to the fund manager. However, the different categories that qualify for the required 80% of the
assets may be vague and wide-ranging. A fund can therefore manipulate prospective investors via
its title: A fund that focuses narrowly on Congo stocks, for example, could be sold with the grander
title "International High-Tech Fund."

Evaluating Funds: Researching and comparing funds can be difficult. Unlike stocks, mutual funds
do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share,
etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio,
less liabilities, but how do you know if one fund is better than another?
The Advantages Of Mutual Funds
Mutual funds are a popular investment vehicle for investors. For investors with limited knowledge,
time or money, mutual funds can provide simplicity and other benefits. To help you decide
whether mutual funds are best for you, here are a few key reasons to consider investing in mutual
funds.

Diversification

One rule of investing, for both large and small investors, is asset diversification. Diversification
involves the mixing of different types of investments within a portfolio and is used to manage risk.
For example, choosing to buy stocks in the retail sector and offsetting them with stocks in the
industrial sector can reduce the impact of the performance of any one security on your entire
portfolio. To achieve a truly diversified portfolio, you may have to buy stocks with
different capitalizations from different industries and bonds with varying maturities from different
issuers. For the individual investor, this can be quite costly.

By purchasing mutual funds, you are provided with the immediate benefit of instant diversification
and asset allocation without the large amounts of cash needed to create individual portfolios. One
caveat, however, is that simply purchasing one mutual fund might not give you adequate
diversification. It's important to check if the fund is sector- or industry-specific. For example,
investing only in an oil and energy mutual fund might spread your money over fifty companies,
but if energy prices fall, your portfolio will likely suffer.

The Advantages Of Mutual Funds

Economies of Scale

The easiest way to understand economies of scale is by thinking about volume discounts; in many
stores, the more of one product you buy, the cheaper that product becomes. For example, when
you buy a dozen donuts, the price per donut is usually cheaper than buying a single one. This also
occurs in the purchase and sale of securities. If you buy only one security at a time, the transaction
fees will be relatively large.

Mutual funds are able to take advantage of their buying and selling volume to reduce transaction
costs for investors. When you buy a mutual fund, you are able to diversify without the
numerous commission charges. Imagine if you had to buy each of the 10-20 stocks needed for
diversification. The commission charges alone would eat up a good chunk of your investment.
Take into account additional transaction fees for every time you want to modify your portfolio,
and as you can see the costs start to add up. With mutual funds, you can make transactions on a
much larger scale for less money.

Divisibility

Many investors don't have the exact sums of money to buy round lots of securities. One or two
hundred dollars is usually not enough to buy a round lot of a stock, especially after deducting
commissions. Investors can purchase mutual funds in smaller denominations, ranging from $100
to $1,000 minimums. Smaller denominations of mutual funds provide mutual fund investors the
ability to make periodic investments through monthly purchase plans while taking advantage
of dollar-cost averaging. So, rather than having to wait until you have enough money to buy
higher-cost investments, you can get in right away with mutual funds. This provides an additional
advantage - liquidity.

Liquidity

Another advantage of mutual funds is the ability to get in and out with relative ease. In general,
you are able to sell your mutual funds in a short period of time without there being much
difference between the sale price and the most current market value. However, it is important to
watch out for any fees associated with selling, including back-end load fees. Also, unlike stocks
and exchange-traded funds (ETFs), which trade any time during market hours, mutual funds
transact only once per day after the fund's net asset value (NAV) is calculated.

Professional Management

When you buy a mutual fund, you are also choosing a professional money manager. This manager
will use the money that you invest to buy and sell stocks that he or she has carefully researched.
Therefore, rather than having to thoroughly research every investment before you decide to buy
or sell, you have a mutual fund's money manager to handle it for you.

The Bottom Line

As with any investment, there are risks involved in buying mutual funds. These investment vehicles
can experience market fluctuations and sometimes provide returns below the overall market.
Also, the advantages gained from mutual funds are not free: many of them carry loads,
annual expense fees and penalties for early withdrawal.
Trading mutual funds for beginners
Buying shares in mutual funds can be intimidating for beginning investors. There is a huge amount
of funds available, all with different investment strategies and asset groups. Trading shares in
mutual funds is different from trading shares in stocks or exchange-traded funds (ETFs). The fees
charged for mutual funds can be complicated. Understanding these fees is important since they
have a large impact on the performance of investments in a fund. The following is a guide to help
get an investor up to speed on the basics of trading mutual funds.

What Are Mutual Funds?

A mutual fund is an investment company that takes money from many investors and pools it
together in one large pot. The professional manager for the fund invests the money in different
types of assets including stocks, bonds, commodities and even real estate. An investor buys shares
in the mutual fund. These shares represent an ownership interest in a portion of the assets owned
by the fund. Mutual funds are designed for longer-term investors and are not meant to be traded
frequently due to their fee structures.

Mutual funds are often attractive to investors because they are widely
diversified. Diversification helps to minimize risk to an investment. Rather than having to research
and make an individual decision as to each type of asset to include in a portfolio, mutual funds
offer a single comprehensive investment vehicle. Some mutual funds can have thousands of
different holdings. Mutual funds are also very liquid. It is easy to buy and redeem shares in mutual
funds.

There is a wide variety of mutual funds to consider. A few of the major fund types are bond
funds, stock funds, balanced funds and index funds.

Bond funds hold fixed-income securities as assets. These bonds pay regular interest to their
holders. The mutual fund makes distributions to mutual fund holders of this interest.

Stock funds make investments in the shares of different companies. Stock funds seek to profit
mainly by the appreciation of the shares over time, as well as dividend payments. Stock funds
often have a strategy of investing in companies based on their market capitalization, the total
dollar value of a company’s outstanding shares. For example, large-cap stocks are defined as those
with market capitalizations over $10 billion. Stock funds may specialize in large-, mid-or small-
cap stocks. Small-cap funds tend to have higher volatility than large-cap funds.

Balanced funds hold a mix of bonds and stocks. The distribution among stocks and bonds in these
funds varies depending on the fund’s strategy. Index funds track the performance of an index such
as the S&P 500. These funds are passively managed. They hold similar assets to the index being
tracked. Fees for these types of funds are lower due to infrequent turnover in assets and passive
management.

How Mutual Funds Trade

The mechanics of trading mutual funds are different from those of ETFs and stocks. Mutual funds
require minimum investments of anywhere from $1,000 to $5,000, unlike stocks and ETFs where
the minimum investment is one share. Mutual funds trade only once a day after the markets close.
Stocks and ETFs can be traded at any point during the trading day.

The price for the shares in a mutual fund is determined by the net asset value (NAV) calculated
after the market closes. The NAV is calculated by dividing the total value of all the assets in
the portfolio, less any liabilities, by the number of outstanding shares. This is different from stocks
and ETFs, wherein prices fluctuate during the trading day.

An investor is buying or redeeming mutual fund shares directly from the fund itself. This is
different from stocks and ETFs, wherein the counterparty to the buying or selling of a share is
another participant in the market. Mutual funds charge different fees for buying or redeeming
shares.

Mutual Fund Charges and Fees

It is critical for investors to understand the type of fees and charges associated with buying and
redeeming mutual fund shares. These fees vary widely and can have a dramatic impact on the
performance of an investment in the fund.

Some mutual funds charge load fees when buying or redeeming shares in the fund. The load is
similar to the commission paid when buying or selling a stock. The load fee compensates the sale
intermediary for the time and expertise in selecting the fund for the investor. Load fees can be
anywhere from 4% to 8% of the amount invested in the fund. A front-end load is charged when an
investor first buys shares in the fund.

A back-end load, also called a deferred sales charge, is charged if the fund shares are sold within a
certain time frame after first purchasing them. The back-end load is usually higher in the first year
after buying the shares, but then goes down each year after that. For example, a fund may charge
6% if shares are redeemed in the first year of ownership, and then it may reduce that fee by 1%
each year until the sixth year, when no fee is charged.

A level-load fee is an annual charge deducted from the assets in a fund to pay for distribution and
marketing costs for the fund. These fees are also known as 12b-1 fees. They are a fixed percentage
of the fund’s average net assets and capped at 1% by law. Notably, 12b-1 fees are considered part
of the expense ratio for a fund.

The expense ratio includes ongoing fees and expenses for the fund. Expense ratios can vary widely
but are generally 0.5 to 1.25%. Passively managed funds, such as index funds, usually have lower
expense ratios than actively managed funds. Passive funds have lower turnover in their holdings.
They are not attempting to outperform a benchmark index, but just try to duplicate it, and thus do
not need to compensate the fund manager for his expertise in choosing investment assets.

Load fees and expense ratios can be a significant drag on investment performance. Funds that
charge loads must outperform their benchmark index or similar funds to justify the fees. Many
studies show that load funds often do not perform better than their no-load counterparts. Thus, it
makes little sense for most investors to buy shares in a fund with loads. Similarly, funds with
higher expense ratios also tend to perform worse than low expense funds.
Because their higher expenses drag down returns, actively managed mutual funds sometimes get
a bad rap as a group overall. But many international markets (especially the emerging ones) are
just too difficult to invest in directly – they're not highly liquid or investor-friendly – and they have
no comprehensive index to follow. In this case, it pays to have a professional manager help wade
through all of the complexities, and who is worth paying an active fee for.

Risk Tolerance and Investment Goals

The first step in determining the suitability of any investment product is to assess risk tolerance.
This is the ability and desire to take on risk in return for the possibility of higher returns. Though
mutual funds are often considered one of the safer investments on the market, certain types of
mutual funds are not suitable for those whose main goal is to avoid losses at all costs. Aggressive
stock funds, for example, are not suitable for investors with very low-risk tolerances. Similarly,
some high-yield bond funds may also be too risky if they invest in low-rated or junk bonds to
generate higher returns.

Your specific investment goals are the next most important consideration when assessing the
suitability of mutual funds, making some mutual funds more appropriate than others.

For an investor whose main goal is to preserve capital, meaning she is willing to accept lower gains
in return for the security of knowing her initial investment is safe, high-risk funds are not a good
fit. This type of investor has a very low-risk tolerance and should avoid most stock funds and many
more aggressive bond funds. Instead, look to bond funds that invest in only highly rated
government or corporate bonds or money market funds.

If an investor's chief aim is to generate big returns, she is likely willing to take on more risk. In this
case, high-yield stock and bond funds can be excellent choices. Though the potential for loss is
greater, these funds have professional managers who are more likely than the average retail
investor to generate substantial profits by buying and selling cutting-edge stocks and risky debt
securities. Investors looking to aggressively grow their wealth are not well suited to money market
funds and other highly stable products because the rate of return is often not much greater than
inflation.

Income or Growth?

Mutual funds generate two kinds of income: capital gains and dividends. Though any net profits
generated by a fund must be passed on to shareholders at least once a year, the frequency with
which different funds make distributions varies widely.

If you are looking to grow her wealth over the long-term and is not concerned with generating
immediate income, funds that focus on growth stocks and use a buy-and-hold strategy are best
because they generally incur lower expenses and have a lower tax impact than other types of
funds.

If, instead, you want to use her investment to create regular income, dividend-bearing funds are
an excellent choice. These funds invest in a variety of dividend-bearing stocks and interest-bearing
bonds and pay dividends at least annually but often quarterly or semi-annually. Though stock-
heavy funds are riskier, these types of balanced funds come in a range of stock-to-bond ratios.
Tax Strategy

When assessing the suitability of mutual funds, it is important to consider taxes. Depending on an
investor's current financial situation, income from mutual funds can have a serious impact on an
investor's annual tax liability. The more income she earns in a given year, the higher her ordinary
income and capital gains tax brackets.

Dividend-bearing funds are a poor choice for those looking to minimize their tax liability. Though
funds that employ a long-term investment strategy may pay qualified dividends, which are taxed
at the lower capital gains rate, any dividend payments increase an investor's taxable income for
the year. The best choice is to direct her to funds that focus more on long-term capital gains and
avoid dividend stocks or interest-bearing corporate bonds.

Funds that invest in tax-free government or municipal bonds generate interest that is not subject
to federal income tax, so these may be a good choice. However, not all tax-free bonds are
completely tax-free, so make sure to verify whether those earnings are subject to state or local
taxes.

Many funds offer products managed with the specific goal of tax-efficiency. These funds employ a
buy-and-hold strategy and eschew dividend- or interest-paying securities. They come in a variety
of forms, so it's important to consider risk tolerance and investment goals when looking at a tax-
efficient fund.

There are many metrics to study before deciding to invest in a mutual fund. Mutual fund
rater Morningstar (MORN) offers a great site to analyze funds and offers details on funds that
include details on its asset allocation and mix between stocks, bonds, cash, and any alternative
assets that may be held. It also popularized the investment style box that breaks a fund down
between the market cap it focuses on (small, mid, and large cap) and investment style (value,
growth, or blend, which is a mix of value and growth). Other key categories cover the following:

 A fund’s expense ratios

 An overview of its investment holdings

 Biographical details of the management team

 How strong its stewardship skills are

 How long it has been around

For a fund to be a buy, it should have a mix of the following characteristics: a great long-term (not
short-term) track record, charge a reasonably low fee compared to the peer group, invest with a
consistent approach based off the style box and possess a management team that has been in
place for a long time. Morningstar sums up all of these metrics in a star rating, which is a good
place to start to get a feel for how strong a mutual fund has been. However, keep in mind that the
rating is backward-focused.

Investment Strategies
Individual investors can look for mutual funds that follow a certain investment strategy that the
investor prefers, or apply an investment strategy themselves by purchasing shares in funds that fit
the criteria of a chosen strategy.

Value Investing

Value investing, popularized by Benjamin Graham in the 1930s, is one of the most well-
established, widely used and respected stock market investing strategies. Buying stocks during the
Great Depression, Graham was focused on identifying companies with genuine value and whose
stock prices were either undervalued, or at the very least not overinflated and therefore not easily
prone to a dramatic fall.

The classic value investing metric used to identify undervalued stocks is the price-to-book (P/B)
ratio. Value investors prefer to see P/B ratios at least below 3, and ideally below 1. However, since
the average P/B ratio can vary significantly among sectors and industries, analysts commonly
evaluate a company's P/B value in relation to that of similar companies engaged in the same
business.

While mutual funds themselves do not technically have P/B ratios, the average weighted P/B ratio
for the stocks that a mutual fund holds in its portfolio can be found at various mutual fund
information sites, such as Morningstar.com. There are hundreds, if not thousands, of mutual funds
that identify themselves as value funds, or that clearly state in their descriptions that value
investing principles guide the fund manager's stock selections.

Value investing goes beyond only considering a company's P/B value. A company's value may exist
in the form of having strong cash flows and relatively little debt. Another source of value is in the
specific products and services that a company offers, and how they are projected to perform in
the marketplace.

Brand name recognition, while not precisely measurable in dollars and cents, represents a
potential value for a company, and a point of reference for concluding that the market price of a
company's stock is currently undervalued as compared to the true value of the company and its
operations. Virtually any advantage a company has over its competitors or within the economy as
a whole provides a source of value. Value investors are likely to scrutinize the relative values of the
individual stocks that make up a mutual fund's portfolio.

Contrarian Investing

Contrarian investors go against the prevailing market sentiment or trend. A classic example of
contrarian investing is selling short, or at least avoiding buying, the stocks of an industry when
investment analysts across the board are virtually all projecting above-average gains for
companies operating in the specified industry. In short, contrarians often buy what the majority of
investors are selling and sell what the majority of investors are buying.

Because contrarian investors typically buy stocks that are out of favor or whose prices have
declined, contrarian investing can be seen as similar to value investing. However, contrarian
trading strategies tend to be driven more by market sentiment factors than are value investing
strategies, and to rely less on specific fundamental analysis metrics such as the P/B ratio.
Contrarian investing is often misunderstood as consisting of simply selling stocks or funds that are
going up and buying stocks or funds that are going down, but that is a misleading
oversimplification. Contrarians are often more likely to go against prevailing opinions than to go
against prevailing price trends. A contrarian move is to buy into a stock or fund whose price is
rising despite continuous and widespread market opinion that the price should be falling.

There are plenty of mutual funds that can be identified as contrarian funds. Investors can seek out
contrarian-style funds to invest in, or they can employ a contrarian mutual fund trading strategy
by selecting mutual funds to invest in using contrarian investment principles. Contrarian mutual
fund investors seek out mutual funds to invest in that hold the stocks of companies in sectors or
industries that are currently out of favor with market analysts, or they look for funds invested in
sectors or industries that have underperformed compared to the overall market.

A contrarian's attitude toward a sector that has been underperforming for several years may well
be that the protracted period of time over which the sector's stocks have been performing poorly
(in relation to the overall market average) only makes it more probable that the sector will soon
begin to experience a reversal of fortune to the upside.

Momentum Investing

Momentum investing aims to profit from following strong existing trends. Momentum investing is
closely related to a growth investing approach. Metrics considered in evaluating the strength of a
mutual fund's price momentum include the weighted average price-earnings to growth (PEG) ratio
of the fund's portfolio holdings, or the percentage year-over-year increase in the fund's net asset
value (NAV).

Appropriate mutual funds for investors seeking to employ a momentum investing strategy can be
identified by fund descriptions where the fund manager clearly states that momentum is a primary
factor in his selection of stocks for the fund's portfolio. Investors wishing to follow market
momentum through mutual fund investments can analyze the momentum performance of various
funds and make fund selections accordingly. A momentum trader may look for funds with
accelerating profits over a span of time; for example, funds with NAVs that rose by 3% three years
ago, by 5% the following year and by 7% in the most recent year.

Momentum investors may also seek to identify specific sectors or industries that are
demonstrating clear evidence of a strong momentum. After identifying the strongest industries,
they invest in funds that offer the most advantageous exposure to companies engaged in those
industries.

The Bottom Line

Benjamin Graham once wrote that making money on investing should depend “on the amount of
intelligent effort the investor is willing and able to bring to bear on his task” of security analysis.
When it comes to buying a mutual fund, investors must do their homework. In some respects, this
is easier than focusing on buying individual securities, but it does add some important other areas
to research before buying. Overall, there are many reasons why investing in mutual funds makes
sense and a little bit of due diligence can make all the difference – and provide a measure of
comfort.
How to Pick the Best Mutual Fund
Are you thinking about investing in a mutual fund, but aren't sure how to go about it or which fund
is the most appropriate based on your needs? You're not alone. However, what you may not know
is that selecting a mutual fund is much easier than you think.

Identifying Goals and Risk Tolerance

Before investing in any fund, you must first identify your goals for the money being invested. Is
your objective long-term capital gains, or is current income important? Will the money be used to
pay for college expenses, or to fund a retirement that's decades away? Identifying a goal is an
important step in whittling down the universe of more than 8,000 mutual funds available to
investors.

In addition, you must also consider personal risk tolerance. Can you accept dramatic swings
in portfolio value? Or, is a more conservative investment more suitable? Risk and return are
directly proportional and you must balance your desire for returns against your ability to tolerate
risk.

Finally, the desired time horizon must be addressed. How long would you like to hold the
investment? Do you anticipate any liquidity concerns in the near future? Mutual funds have sales
charges and that can take a big bite out of your return over short periods of time. To mitigate the
impact of these charges, an investment horizon of at least five years is ideal.

How To Pick A Good Mutual Fund

Style and Fund Type

The primary goal for growth funds is capital appreciation. So If you plan to invest to meet a longer-
term need and can handle a fair amount of risk and volatility, a long-term capital appreciation
fund may be a good choice. These funds typically hold a high percentage of their assets in common
stocks and are, therefore, considered to be volatile in nature. Given the higher level of risk,
they offer the potential for greater returns over time. The time frame for holding this type of
mutual fund should be five to 10 years at least.

Growth/capital appreciation funds generally do not pay any dividends. So, if you need current
income from your portfolio, an income fund may be a better choice. These funds usually
buy bonds and other debt instruments that pay interest regularly. Government
bonds and corporate debt are two of the more common holdings in an income fund. Bond funds
often narrow their scope in terms of the category of bonds they hold. Funds may also differentiate
themselves by time horizons such as short, medium or long term.

These funds often have significantly less volatility, depending on the type of bonds in the portfolio.
Bond funds often have a low or negative correlation to the stock market. You can, therefore, use
them to diversify the holdings in your stock portfolio.

Bond funds carry risk despite their lower volatility, however. These include:

 Interest rate risk is the sensitivity of bond prices to changes in interest rates. When
interest rates go up, bond prices go down.
  Credit risk is the possibility that an issuer could have its credit rating lowered. This
adversely impacts the price of the bonds.

 Default risk is the possibility that the bond issuer defaults on its debt obligations.

 Prepayment risk is the risk of the bond holder paying off the bond principal early to take
advantage of reissuing its debt at a lower interest rate. Investors are likely to be unable to
reinvest and receive the same interest rate.

However, you may want to include bond funds for at least a portion of your portfolio for
diversification purposes, even with these risks.

Of course, there are times when an investor has a longer-term need but is unwilling or unable to
assume substantial risk. In this case, a balanced fund, which invests in both stocks and bonds, may
be the best alternative.

Charges and Fees

Mutual fund companies make money by charging fees to the investor. It is important to
understand the different types of fees associated with an investment before you make a purchase.

Some funds charge a sales fee known as a load, which will either be charged at the time of
purchase or upon the sale of the investment. A front-end load fee is paid out of the initial
investment, when you buy shares in the fund, while a back-end load fee is charged when you sell
your shares in the fund. The back-end load typically applies if the shares are sold before a set time
period, usually five to 10 years from purchase. This is intended to deter investors from buying and
selling too often. The fee is the highest for the first year you hold the shares, then dwindles the
longer you hold them.

Front-end loaded shares are identified as Class A shares, while back-ended loaded shares are
called Class B shares.

Both front- and back-end loaded funds typically charge 3% to 6% of the total amount invested or
distributed, but this figure can be as much as 8.5% by law. The purpose is to discourage turnover
(which can be detrimental to the investor) and cover administrative charges associated with the
investment. Depending on the mutual fund, the fees may go to the broker who sells the mutual
fund or to the fund itself, which may result in lower administration fees later on.

There's a third type of fee, called a level-load fee. The level load is an annual charge amount
deducted from assets in the fund. Class C shares carry this sort of fee.

No-load funds don't charge a front- or back-end load fee. However, the other fees in a no-load
fund, such as the management expense ratio and other administration fees, may be very high.

Other funds charge 12b-1 fees, which are baked into the share price and are used by the fund for
promotions, sales and other activities related to the distribution of fund shares. These fees
come off of the reported share price at a predetermined point in time and as a result, investors
may not be aware of the fee at all. The 12b-1 fees can be, by law, as much as 0.75% of a fund's
average annual assets under management.
One final tip when reviewing mutual fund sales literature: Always look at the management
expense ratio. That figure can help clear up any and all confusion relating to sales charges.
This ratio is simply the total percentage of fund assets that are being charged to cover fund
expenses. The higher the ratio, the lower the investor's return will be at the end of the year.

Passive Vs. Active Management

Determine if you want an actively or passively managed mutual fund. Actively managed
funds have portfolio managers who make decisions regarding which securities and assets to
include in the fund. Managers do a great deal of research on assets and consider sectors, company
fundamentals, economic trends and macroeconomic factors when making investment decisions.
Active funds seek to outperform a benchmark index, depending on the type of fund. Fees are
often higher for active funds. Expense ratios can vary from 0.6 to 1.5%.

Passively managed funds, often called "index funds," seek to track and basically duplicate the
performance of a benchmark index. The fees are generally lower than they are for actively
managed funds, with some expense ratios as low as 0.15%. Passive funds do not trade their assets
very often, unless the composition of the benchmark index changes. This results in lower costs for
the fund. Passively managed funds may also have thousands of holdings, resulting in a very well-
diversified fund. Since passively managed funds do not trade as much as active funds, they are not
creating as much taxable income, which can be an important consideration for non-tax-
advantaged accounts.

There's an ongoing debate about whether actively managed funds are worth the higher fees they
charge. The S&P Indices Versus Active (SPIVA) report for 2017 (released in March 2018) showed
that, over the past five years and the past 15 years, no more than 16% of managers in any
category of actively managed U.S. mutual funds beat their respective benchmarks. Of course, most
index funds don't beat the index, either: Their expenses, low as they are, typically keep an index
fund's return slightly below the returns of the index itself. Nevertheless, the failure of actively
managed funds to beat their indexes has made index funds immensely popular with investors of
late.

Evaluating Portfolio Managers and Past Results

As with all investments, it's important to research a fund's past results. To that end, the following
is a list of questions that prospective investors should ask themselves when reviewing a fund's
track record:

 Did the fund manager deliver results that were consistent with general market returns?

 Was the fund more volatile than the major indexes (meaning did its returns vary
dramatically throughout the year)?

 Was there unusually high turnover (which can result in larger tax liabilities for the
investor)?

The answers to these questions will give you insight into how the portfolio manager performs
under certain conditions, and illustrate the fund's historical trend in terms of turnover and return.
Prior to buying into a fund, it makes sense to review the investment manager's literature. The fund
manager should give you some sense of the prospects for the fund and/or its holdings in the
year(s) ahead and discuss general industry and market trends that may affect the fund's
performance.

Size of the Fund

Typically, the size of a fund does not hinder its ability to meet its investment objectives. However,
there are times when a fund can get too big. A perfect example is Fidelity's Magellan Fund. In
1999, the fund topped $100 billion in assets and was forced to change its investment process to
accommodate the large daily (investment) inflows. Instead of being nimble and buying small-
and mid-capstocks, the fund shifted its focus primarily towards larger capitalization growth stocks.
As a result, performance suffered.

So how big is too big? There are no benchmarks set in stone, but $100 billion in assets under
management certainly makes it more difficult for a portfolio manager to efficiently run a fund.

History Often Doesn't Repeat

We’ve all heard that ubiquitous warning: “Past performance does not guarantee future results.”
Yet looking at a menu of mutual funds for your 401(k) plan, it’s hard to ignore those that have
crushed the competition in recent years.

But are historical outcomes a good indicator of results down the road? The data would seem to
indicate otherwise. One study looked at mutual-fund data over a 16-year period and found that
just 7.8% of the top 100 fund managers in any given year retained that distinction the following
year.

A separate report by Standard & Poor’s showed that only 21.2% of domestic stocks in the top
quartile of performers in 2011 stayed there in 2012. And slightly more than 7% remained in the
top quartile two years later.

Subsequent Performance of Mutual Funds in the Top Quartile in 2011

Source: Standard & Poor’s

Why are past results so unreliable? Shouldn't star fund managers be able to replicate their
performance year after year?

Certainly, some actively traded funds beat the competition fairly regularly over a long period. But
the inherent unpredictability of the market means that even the best minds in the business will
have bad years.

A study by investment firm Robert W. Baird & Co. looked into this phenomenon. What the
company found was that, even among fund managers who outpaced the market over a 10-year
period, many experienced two- or three-year stretches during which they trailed the pack.
Translation: When looking at a fund's recent outcomes and the numbers look unimpressive, it’s
hard to tell if it’s a bad manager having a bad year or a good manager having a bad year.

There’s an even more fundamental reason not to chase high returns. If you buy a stock that’s
outpacing the market – say, one that rose from $20 to $24 a share in the course of a year – it could
be that it’s only worth $21. And once the market realizes the security is overbought, a correction is
bound to take the price down again.

The same is true for a fund, which is simply a basket of stocks or bonds. If you buy right after an
upswing, it’s very often the case that the pendulum will swing in the opposite direction.

What Really Matters

Rather than looking at what happened in the past, investors are better off taking into account the
various factors that do influence future results. In this respect, it might help to learn a lesson
from Morningstar Inc., one of the country’s leading investment research firms.

Since the 1980s, the company has assigned a star rating to mutual funds based on risk-adjusted
returns. However, research showed that these scores demonstrated little correlation with future
success.

Morningstar has since introduced a new grading system based on five P’s: Process, Performance,
People, Parent and Price. With the new rating system, the company looks at the fund’s investment
strategy, the longevity of its managers, expense ratios and other relevant factors. The funds in
each category earn a Gold, Silver, Bronze or Neutral rating.

The jury’s still out on whether this new method will perform any better than the original one.
Regardless, it’s an acknowledgment that historical results, by themselves, tell only a small part of
the story.

If there’s one factor that does consistently correlate with strong performance, it’s fees. This
explains the popularity of index funds and ETFs, which, at a much lower cost than actively traded
funds, mirror a market index.

It’s tempting to judge a mutual fund based on recent returns. But if you really want to pick a
winner, look at how well it’s poised for future success, not how it did in the past. For background,
check out our Mutual Fund Basics Tutorial and 3 Strategies for Trading Mutual Funds.

The Bottom Line

Selecting a mutual fund may seem like a daunting task, but doing a little research and
understanding your objectives and risk tolerance is half of the battle. If you carry out this due
diligence before selecting a fund, you'll increase your chances of success.
How to Buy Mutual Funds Online
Like stocks and bonds, mutual funds are easy to trade online. All you have to do is know where to
buy them, what kind of fund you want and how much you want to invest. There are also some fees
and expenses you should be aware of before you make any mutual fund investments.

Where to Buy

There are three basic ways to purchase mutual funds online, and a myriad of different websites
facilitate these transactions.

If you have a self-directed retirement account, such as an IRA or 401(k), the managing financial
institution likely allows for mutual fund trading through its site to facilitate your retirement
planning. If you are looking to build your savings through a tax-deferred account, or are interested
in a mutual fund that makes frequent taxable distributions but do not currently need the
investment income, check with your retirement plan administrator to see if you can trade through
it directly.

If you are not looking to invest through a retirement account, the most obvious option is to buy
mutual funds directly through the financial institutions that offer them. There are a number of
well-respected investment firms in the U.S. and abroad that offer a wide range of mutual funds to
suit any investment need. Each firm offers at least a few different funds, from passive index funds
to high-risk, high-yield bond and equity funds, designed to appeal to different investors.

If you do not want to be tied to the products offered by one particular company, some mutual
funds allow you to use an in-house account to buy and sell products offered by other firms, though
you may incur additional transaction fees. Another option is to use an online brokerage account
through a trusted site such as TD Ameritrade, E-TRADE or Charles Schwab. Typically, these types of
accounts charge a transaction fee for each trade, and they may also charge other account setup or
maintenance fees. However, it is fairly simple to find an account with relatively low fees.

Choosing a Fund

After you decide how you want to make your investment, you must decide what kind of mutual
fund best suits your investment needs. First, consider your risk tolerance. Risk tolerance refers to
your ability to handle the possibility that you might lose money on any given investment. Typically,
investments that offer the potential for big gains, such as high-yield mutual funds and most stock
investments, also come with a greater amount of risk than investments that offer more modest
returns. If you have a low risk tolerance, avoid mutual funds that invest in highly volatile securities
or employ aggressive investment strategies that seek to beat the market.

Next, determine what you are trying to accomplish with this investment. If you want something
that generates consistent investment income each year, choose a mutual fund that pays
dividends. If you want to minimize the short-term tax impact of your investment, choose a fund
that makes very few annual distributions, does not pay dividends and focuses on long-term
growth. If your chief goal is to create wealth quickly, even if it means increased risk, look at high-
yield bond or equity funds. Each mutual fund is required to provide a prospectus that outlines the
goals of the fund and the contents of its portfolio.
If you choose an actively managed fund, research the track record of your chosen fund's manager.
The success of actively managed funds depends on the experience, skill, and instinct of the fund's
manager, so the historical returns generated by other funds under his care are a good indication of
his prowess. If you choose an indexed fund, which is passively managed, this is less of an issue.

Expense Ratio

Now that you have chosen a fund and website to invest through, you should be aware of the types
of fees and expenses you are likely to incur. In some cases, the costs associated with a given
mutual fund may render its returns considerably less impressive.

The one cost carried by all mutual funds is called an expense ratio. This is simply a percentage of
the value of your investment, generally between 0.1% and 3%, the mutual fund charges each year
to defray its administrative and operating costs. Actively managed funds typically have higher
expense ratios than their passively managed counterparts because their increased trading activity
generates more paperwork and requires more man-hours.

If the fund you choose has a particularly high ratio, make sure there is not a cheaper fund offered
elsewhere with the same objectives and a similar portfolio. For indexed funds, especially, look for
the cheapest fund available. Since indexed mutual funds are designed to simply invest in all the
securities of a given index, there is little difference between funds that track the same index.

Fees and Share Classes

In addition to the annual expense charge, many funds impose a load fee. A load fee is essentially a
commission charge paid to the broker who sold you the fund. Load fees can be charged at the time
of investment, called a sales charge, or at redemption, called a deferred sales charge. Some funds
are advertised as no-load funds. However, be aware they can still charge a number of other fees
that make them just as expensive.

Carefully read the terms of your chosen fund to see if it charges any redemption, purchase or
exchange fees to shareholders who wish to alter their initial investment by selling shares, buying
additional shares or moving to another fund offered by the same firm. Other fees include 12b-1
fees, to defray the cost of marketing and advertising the fund and account fees.

Many funds offer three classes of shares, such as A, B, and C, that carry different types of expenses
to cater to different investment strategies. For example, Class A shares typically carry a front-end
load fee but have lower expense ratios and 12b-1 fees than B and C shares, making them better
suited for someone who wants to make a single investment and hold it for a long period. Assess
which share class provides the best value given your intended investment strategy.

Executing Your Trade

After you submit the necessary information and establish an account on your chosen trading
platform, buying and selling mutual funds is simple. While each site is a little different, they all
operate in essentially the same way. Indicate the ticker symbol of the fund you want to buy and
the amount you want to invest. Unlike stocks, mutual funds require you invest a set dollar amount
rather than purchasing a certain number of shares. In addition, you may be asked how you want
dividend distributions handled: either by reinvesting them in the fund automatically or having
them deposited into your investment account as cash.

Once you fill out the trade request, your trade remains pending until the fund's daily share value is
calculated at the end of the trading day. Most mutual funds report their net asset value (NAV) by 6
p.m. EST. Once the NAV is reported, you know how many shares you have purchased.

It takes between one and three business days for your trade to "settle," meaning the official
financial transaction is not completed right away. Investment firms and brokerage sites post
information about how long it takes mutual fund trades to settle, but the SEC requires it to be no
longer than three business days.
A Guide to Mutual Fund Trading Rules
Investing in mutual funds isn't difficult, but it isn't quite the same as investing in exchange-traded
funds (ETFs) or stocks, either. Because of their unique structure, there are certain aspects of
trading mutual funds that may not be intuitive for the first-time investor. Due to past abuses,
many mutual funds impose limitations or fines on certain types of trading activity.

Before you begin investing in mutual funds, consider the following trading guidelines. A basic
understanding of the ins and outs of mutual fund trading can help you navigate the process
smoothly and get the most out of your investment.

Buying Mutual Fund Shares

Buying mutual funds shares is fairly simple. While mutual funds are not traded freely on the open
market, like stocks and ETFs, they are easy to purchase directly from the fund or through an
authorized broker, often through an online platform.

Before purchasing shares in a mutual fund, understand what type of fund you're investing in and
the specific terms of investment. Many funds require a minimum contribution, often between
$1,000 and $10,000. However, not all funds carry minimums.

Research the fund's holdings, its expense ratio, and the fund manager's track record. If it is an
indexed fund, check its historical tracking error. Like any investment, you should know what you're
getting into.

Mutual Fund Share Prices

You can only purchase mutual fund shares at the end of the day. Unlike exchange-traded
securities, the value of mutual fund shares does not fluctuate throughout the day. Instead, the
fund calculates the net value of all the assets in its portfolio, called the net asset value (NAV),
when the market closes each day. The market closes at 4 p.m. Eastern Time, and mutual funds
typically post their current NAVs by 6 p.m.

If you want to buy shares, your order will be fulfilled after the day's NAV has been calculated. If
you want to invest $1,000, for example, you can place your order at any time, but you won't know
how much you'll pay per share until the day's NAV is posted. If the day's NAV is $50, then your
$1,000 investment will buy 20 shares.

Mutual funds typically allow investors to purchase fractional shares. If the NAV in the above
example is $51, your $1,000 will buy 19.6 shares.

Fees

Look at the costs associated with your investment before you purchase it. Mutual funds carry
annual expense ratios equal to a percentage of your investment, and there are a number of
other fees a mutual fund may charge.

Some mutual funds charge load fees, which are essentially commission charges. These fees do not
go to the fund; they compensate brokers who sell shares in the fund to investors. Not all mutual
funds carry upfront load fees, however. Instead of a traditional load fee, some funds charge back-
end load fees if you want to redeem your shares before a certain number of years have elapsed.
This is sometimes called a contingent deferred sales charge (CDSC).

Mutual funds may also charge purchase fees (at the time of investment) or redemption fees (when
you sell shares back to the fund), which go to defray costs incurred by the fund rather than to
brokers in lieu of commission. Most funds also charge 12b-1 fees, which go towards marketing and
advertising the fund. Many funds offer different classes of shares, called A, B or C shares, which
offer different fee and expense structures.

Trade and Settlement Dates

When trading mutual funds, understand how and when your trades will be executed. The date
when you place your order to purchase or sell shares is called the trade date. However, the
financial transaction is not finalized, or settled, until a number of days have elapsed. The Securities
and Exchange Commission (SEC) requires mutual fund transactions to settle within two days after
the trade date.

If you place an order to buy shares on Friday, Jan. 2, for example, a fund with a two-day
settlement period is required to settle your order by Tuesday, Jan. 6, since trades cannot be
settled over the weekend.

Ex-Dividend and Report Dates

If you are investing in a mutual fund that pays dividends, but you want to limit your tax liability,
find out when shareholders are eligible for dividend payments. Any dividend distributions you
receive increase your taxable income for the year, so if generating dividend income is not your
primary goal, don't buy shares in a fund that is about to issue a dividend distribution.

The ex-dividend date is the last date when new shareholders can be eligible for an upcoming
dividend. Because of the settlement period, the ex-dividend date is typically three days prior to
the report date – the date when the fund reviews its list of shareholders who will receive the
distribution.

If you want to receive an upcoming dividend payment, purchase shares prior to the ex-dividend
date to ensure your name is listed as a shareholder on the date of record. If you want to avoid the
tax impact of a dividend distribution, delay your purchase until after the date of record.

Selling Mutual Fund Shares

Just like your original purchase, you redeem mutual fund shares directly through the fund itself or
through an authorized broker. The amount that you receive is equal to the number of shares
redeemed multiplied by the current NAV, minus any fees or charges due.

Depending on how long you have held your investment, you may be subject to a CDSC. If you want
to sell your shares very soon after purchasing them, you may be subject to additional fees for early
redemption.

Early Redemption Regulations

Mutual funds are built to be long-term investments. Unlike stocks and ETFs, short-term trading of
mutual fund shares can seriously deteriorate the returns of remaining shareholders.

When you redeem your mutual fund shares, the fund often has to liquidate assets to cover the
redemption, since mutual funds are not in the habit of keeping cash on hand. Any time a fund sells
an asset at a profit, it triggers a capital gains distribution to all shareholders, thereby increasing
their taxable incomes for the year and reducing the value of the fund's portfolio. This kind of
frequent trading activity also causes a fund's administrative and operational costs to rise,
increasing its expense ratio.

To discourage excessive trading and protect the interests of long-term investors, mutual funds
keep a close eye on shareholders who sell shares within 30 days of purchase – called round-trip
trading – or otherwise try to time the market to profit from short-term changes in a fund's NAV.
Mutual funds may charge early redemption fees, or they may bar shareholders who employ this
tactic frequently from making trades for a certain number of days.