A mutual fund is actually a lot like a company - complete with a president, a board of directors, and a team of skilled professionals. In fact, a mutual fund is required to provide annual reports just like a company, conducts shareholder meetings, and is very closely regulated.
Mutual funds pool investors' money to purchase stocks, bonds, or other financial instruments for the purpose of meeting specific financial objectives. Depending on their objectives, mutual funds can invest in one of these types of securities or a combination of them. You'll find a mutual fund's objective in its prospectus, which is a formal written offer to sell shares. Prospectuses are usually available online, or by calling the mutual fund company directly. Mutual fund investors, or shareholders, own a proportional portion, or "share," of all the securities owned by the fund.
Note: You can get access to prospectuses for the mutual funds available through your plan if you log on to Fidelity NetBenefitsSM and open your retirement savings account.
A mutual fund's objective is a statement of what the fund intends to do. For instance, the objective of a typical stock fund might be "capital appreciation," or growth of your investment. How the fund achieves this objective depends largely on what it invests in. Should it purchase stocks at a low price that increase in value over time, the objective might very well be met. However, if these stocks decline in value over time, it may take a long time for those objectives to be realized.
The most important task for you, the individual investor, is to try to match your investment objectives with that of the mutual funds you choose. For instance, if your goal is conservative - say, to preserve your money and stay just ahead of inflation -- you may want to look for funds with similar, conservative objectives, avoiding funds whose aim is to achieve high growth with high risk. However, should you be looking to grow your investment over time, and are willing to accept the risks that accompany those goals, more aggressive funds might be just the ticket for you.
Would you like to know more about mutual funds? If your 401(k) plan account is serviced by Fidelity, you can access "The Mutual Fund - It's No Mystery," a six-part series covering the basics. Find it by logging into Fidelity NetBenefitsSM and clicking on the Planning tab.
Cheryl Marconi is a Massachusetts-based financial writer and editorial consultant. She has worked in the publishing and financial services industries for the past eleven years.
