Understanding load funds

A load is a sales charge or commission payable to the person who sells you a mutual fund. A load fund is a mutual fund on which such fees are charged.
Typically, a financial professional sells a load fund. Some load funds are sold by full-service brokers — salespeople who advise you on your investment choices, provide you with brochures and research reports, and pocket a commission in return for their work. Financial planners, bankers, insurance agents, and other financial professionals also sell load funds.
All load funds carry attached sales commissions, usually representing about 5% of your investment. For example, if you invest $1,000 in a certain load stock fund with a 5.75% sales charge, $57.50 comes off the top to pay the broker. The remaining $942.50 is your investment in the mutual fund itself.

Learning about Balanced Funds

A balanced fund owns both stocks and bonds. It’s a conservative type of fund investment, one that attempts to make it easy for investors to enjoy some of the safety of bonds along with the growth potential of stocks through a single investment.
The typical balanced fund is 60% invested in stocks and 40% in bonds. Its investment objective is to conserve principal (that is, avoid losing any of the money invested), pay current income (that is, dividends), and achieve long-term growth.
If you’re a brand-new investor, a balanced fund can be an easy, safe choice. If you have a little more experience, consider creating your own “balanced” fund by dividing your money between stock and bond funds of your choice.

By selecting funds that closely fit your own investment goals, you’re likely to achieve better results than you can get from a prepackaged balanced fund.

Corporate bond funds

A corporate bond fund invests in debt issued by companies that need to raise money. Such bonds are rated for their safety by Standard & Poor’s and Moody’s, two companies that specialize in examining the finances of companies and determining whether they are likely to be able to pay off their debts in a timely fashion.
Standard & Poor’s and Moody’s rate bonds using letter grades — S&P’s AAA and Moody’s Aaa represent the highest possible grades. In general, investors want to invest in bond funds that hold bonds rated in the four highest categories: AAA (“triple A”), AA, A, and BBB, according to S&P or Aaa, Aa, A, and Baa, according to Moody’s. The companies that issue these bonds are unlikely to go bankrupt or to fail to repay their debts, so the risk is fairly low. However, corporate bond funds are still slightly riskier than government bonds, so corporate bonds pay slightly better interest to compensate.
One type of corporate bond for most investors to avoid is the so-called high-yield bond, also known as a junk bond. As the latter name implies, such bonds are very risky. They’re offered by companies that are small, sometimes struggling, and prone to great shifts of fortune, either up or down.
Fortunes have been made by high-yield bond investors — and also lost. If you’re offered the opportunity to invest in a high-yield bond fund, examine it cautiously, and only invest money that you can afford to lose. It may happen.
Because investors are wary of high-yield or junk bonds, some brokers or other bond funds salespeople may try to sell you a high-yield bond fund without identifying it as such. If you are offered shares in a bond fund with an interest rate two or three percentage points higher than other funds you are considering, be careful! Chances are that the risk associated with the fund is very high, even if the salesperson doesn’t reveal the fact.

Municipal bond funds

A municipal bond is an IOU issued by a state, country, city, or other local government, often designed to raise money for a particular purpose. A county may issue bonds, for example, in order to borrow money to build a new airport, fix local roads, or expand a park. A municipal bond fund invests in a portfolio of such bonds.
Municipal bonds often pay slightly lower interest rates than other government or corporate bonds. Their popularity stems from their tax advantages. The interest from most municipal bonds is exempt from federal income taxes. Furthermore, you don’t pay state taxes on municipal bonds issued within your own state; and, if you pay local income taxes (as residents of New York City do, for example), you can even find triple tax exempt bonds that are free from local income taxes, too.
To decide whether a municipal bond fund makes sense for you, figure out what tax bracket you are in. (This will depend on your annual income as well as the number and kind of tax exemptions and deductions you enjoy. Any tax advisor can help you determine this.)

Money market funds

A money market mutual fund invests in short-term bonds issued by the U.S. government, large corporations, states and local governments, banks, and other rock-solid institutions. A money market fund is considered a conservative investment with little possibility of losing money; in fact, many investors and financial experts refer to money market funds as a cash equivalent, almost as safe and liquid as money in the bank.
Because money market investments are short-term (that is, bonds that are to be paid off within a few weeks or months), they closely reflect current interest rates. Most money market mutual funds are currently earning about 4% interest (computed as an annual growth rate).
During the early 1980s, when inflation and interest rates were both very high, money market funds earned over 10% annually. Such growth is unlikely to return unless economic conditions change dramatically.
You can invest in money market funds through a mutual fund company or a bank. In most cases, banks pay slightly lower interest rates than do mutual fund companies. Also remember that your money market investment through a bank is not federally insured, unlike ordinary bank deposits. A money market fund is a good place to keep money that you may need in a hurry. It’s also a handy parking place for money that you plan to invest somewhere, but you just haven’t decided exactly where.
For example, Joanne gets a larger-than-expected end-of-year bonus from the company where she works — $2,500. She can deposit the bonus check in a money market fund managed by a mutual fund companies. It will immediately begin earning about 4% interest. Over the next month or two, Joanne can take her time to research other investment opportunities. If she then decides to invest the bonus in a growth fund (for example), she can move the money from the money market fund into the growth fund simply by placing a call to the mutual fund company.

Exploring Bond (Fixed Income) Funds

Bond funds invest in many kinds of bonds, which represent IOUs from business or government agencies to which money has been lent. The primary objective of a bond fund is income from the interest paid on the loans. Whereas the value of a stock constantly changes in ways that are often unpredictable, the interest income on a bond is predetermined and can be relied upon, unless the business or government agency runs into serious financial difficulties. Thus, bonds are sometimes called fixed income securities, and bond funds may be referred to as fixed income funds. Because bond funds are usually less volatile and lower-risk than stock funds, they are often chosen by investors whose main objective is safety. Therefore, consider bond funds for short-term investment goals. In addition, many investors like to keep a portion of their money in bonds at all times, as a way of guarding against large, unexpected shifts in the stock market.

Emerging Market Mutual Funds

An emerging market mutual fund is a type of international fund that invests in so-called emerging markets, such as Latin America, Africa, Southeast Asia, the Middle East, and Eastern Europe.
Emerging market funds are relatively risky for several reasons. Currency values are often volatile, making currency risk greater than with the developed nations of Europe or Asia; political problems are more likely, which can affect the economic prospects of a country and therefore the value of your investments. In addition, stock markets in emerging nations are usually less liquid because you have fewer investors looking for stocks to buy.
You can make big returns from an emerging market fund, especially if your fund’s manager is fortunate enough to pick countries or companies that are on the verge of successful business breakthroughs.
But the potential for large losses is always present. Consider investing part of your portfolio in an emerging market fund, but only a portion that you can afford to lose.

International Mutual Funds

More and more investors today are seeking investment opportunities outside the United States. This makes economic sense. Although the United States is still a dynamic, growing nation, it’s also a mature country, whose business, social, and economic structures are largely in place. By contrast, some other regions of the world have the potential of growing very quickly in the years ahead, as they try to rapidly catch up to the United States in terms of industry and consumer spending.
Investors seeking growth opportunities should consider putting at least part of their money into international or global mutual funds, which specialize in foreign investments. Naturally, international investing involves many complexities. Someone who invests in foreign stocks has to worry about foreign economies, interest rates, tax laws, political conditions, and business practices. But with an international mutual fund, the fund manager does all the research — and the worrying — for you. You gain exposure to overseas opportunities without the headaches.
One type of risk that is unique to international investing is currency risk. When you put $1,000 in an international fund, you are, in effect, buying foreign currency, because the fund has to change your dollars into German marks, Russian rubles, Indian rupees, or some other foreign money before it can be invested.
As you know, the exchange rate between U.S. currency and other currencies is constantly in flux, based mainly on changes in the world and local economies. One day, the U.S. dollar may be worth 110 Japanese yen; the next day, it may rise to 150 yen. When the U.S. dollar is up, the relative value of your foreign holdings will go down. On the other hand, when the dollar drops, your foreign currencies go up, which is an added benefit to your portfolio.
To minimize the dangers of currency risk, try to limit your international investing to long-term money — funds you won’t need to withdraw quickly. By exercising patience, you can wait for a favorable movement in currency values before you sell your shares. Also, try to diversify your international holdings. Pick funds that invest in several international economies rather than just one. Currency losses in one country can offset profits in another.
International funds include funds that invest in specific countries, such as England or Japan, as well as regional funds. The term global is generally used to describe funds that invest in U.S. companies as well as foreign ones.

Growth and Income Funds

A growth and income fund is generally lower in risk than a growth fund. Such a fund invests in companies that have good growth potential but also pay dividends to their investors.
The fact that the fund profits in at least two ways from its investments cushions volatility, making it more of an “allweather” fund than the more uncertain growth fund. This type of fund is less volatile because the dividends keep coming even if the stock price goes down.
In most cases, stock dividends represent a relatively minor portion of the profits you make from a mutual fund. In a recent year, for example, stocks listed in the S&P 500 Index paid an average dividend of about 1.3%. (Thus, if you owned a share of stock priced at $75 which paid the average dividend, you’d receive, in the course of the year, checks totaling $0.97 per share — not a huge sum by any standard.) On the other hand, the average dividend yield from an aggressive growth fund in the same year was just 0.2%. Obviously, if the security of knowing that dividends are rolling in is important to you, stay with a growth and income fund rather than seeking aggressive growth.