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Introduction | Balanced Funds | Bond Funds | Equity Funds | Money Market Funds | Risk and Fees
A mutual fund is a collection of securities owned by a group of investors and managed by a professional investment adviser. A mutual fund pools investors' money to invest in a portfolio of stocks, bonds, money markets or a combination of these asset classes. Because the fund typically holds many different types of securities within a particular asset class, it offers greater diversification than you could achieve on your own. Most mutual funds aim at a particular objective—whether immediate income, income and growth, or long-term growth.
Some mutual fund families pay Park Avenue Securities (PAS), Guardian's retail broker/dealer, for marketing services and the education and training support of our Financial Representatives. While PAS Financial Representatives do not receive any portion of these payments, you should read more about these payments in the various funds' prospectuses or Statements of Additional Information. PAS may receive compensation of up to 0.20 percent of the assets held at the mutual fund family. For example, if you held $10,000 with a participating mutual fund family for one year, PAS could receive up to $20. Mutual fund families currently participating in this type of support: American Funds, OppenheimerFunds.
Balanced funds widely diversify their portfolio holdings among asset classes such as common stocks, bonds, and money market instruments, in fixed percentages. As a very general rule (and there are exceptions) the value of stocks and bonds vary inversely - that is, when one is up, the other is down. A balanced fund invests in stocks, bonds and cash either directly or through investments in other mutual funds.
For example, the fund may be invested 60% in large cap stocks and 40% in investment grade bonds. With this type of fund, you don't need to decide how much of each type of investment to make, since the fund does this for you. This type of fund usually offers a middle ground in the risk/reward spectrum-usually less risky than 100% stock funds, but with a generally higher return than 100% bond funds.
Bond funds typically invest in corporate or government bonds. The value of the underlying bonds fluctuates with interest rates. A bond is an IOU issued by a company (a corporate bond) or government entity or agency (a government bond). When your mutual fund buys a bond, it is loaning money to the issuer for a set period of time. In exchange, the issuer pays interest at specified intervals, and returns the full amount when the bond matures. However, in a mutual fund, bonds are bought and sold all the time, so the fund rarely holds the bond until maturity.
While bonds are generally considered relatively conservative investments, they do go up and down in price as interest rates change. Because of this interest rate risk, a portion of one's original investment can be lost when bond holdings are sold. Another risk factor to consider is credit risk.
Some bonds are issued by well-known companies with plenty of assets and cash flow to pay off their debt. These are considered investment grade bonds. Other bonds are called high yield or "junk" bonds because the issuer has a higher than normal risk of not being able to repay its debt. Because a mutual fund holds bonds issued by many companies, default by any one issuer shouldn't affect your return too much. But high yield bond funds, which hold bonds that may produce higher income payouts than other bonds, tend to be more volatile (go up and down in value) more than investment grade bond funds, which is why they are considered riskier.
Investments in lower rated and unrated bonds are subject to a greater loss of principal and interest than investments in higher rated securities.
Known as an equity investment, stocks represent a share of ownership, or equity, in a company. When a mutual fund buys stocks, it becomes part owner of the business that issued it.
Within the equity category, some types of investments are considered riskier than others. The size of the company is one major variable. Companies with large market capitalization (large caps) are generally well-known companies that have been in business for many years. The S&P 500 Index is an unmanaged index that is generally considered to be representative of the performance of the largest of these large cap stocks. It is not available for direct investment, but you can often purchase an "index fund" which will tend to track its performance.
Small cap stocks entail special risks. They are generally companies in newer industries, or a new company in an older industry, which may not have much of a track record. They can offer the potential for high returns, but also tend to be more volatile and drop more in down markets than large cap stocks. Owning international stocks offers another type of diversification for investors. When the U.S. stock markets are down, at times markets in other countries are up. However, there are significant risks in international investing, including the risks of currency fluctuations, differences in auditing and financial standards, political uncertainty and greater volatility. Funds that invest primarily in developed economies, such as those in Western Europe and the Pacific Rim, are considered less risky than those that invest in emerging markets. Emerging markets include those in Latin America, Eastern Europe.
Money Market funds invest in highly liquid securities such as Certificates of Deposit (CDs) and government securities. Money Market funds generally create the least market risk, but also tend to provide the smallest returns. Fund shares are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC.) or any other Governmental Agency.
Although the fund seeks to preserve the value of your investments at $1.00 per share, it is possible to lose money by investing in these types of funds.
CDs offer a fixed interest rate and are FDIC insured.
A Word About Risk and Fees
The value of your investment could decline so you could lose money. Mutual funds are subject to the general risks of investing in the stock securities, which include the risk that share prices of the securities in its portfolio can be driven down gradually or sharply by general conditions in the markets, or by the performance of an individual company or industry.
Generally, the fees associated with a mutual fund include annual charges for an investments management fee and an administrative service fee, which are deducted from the Fund's assets on a daily basis. Other expenses include accountant, custodial and transfer agent fees. Many funds also impose a sales charge, either at the time you purchase or redeem your shares, and a 12b-1 distribution fee.
Investing in bonds exposes you to the general risk of investing in the debt markets. These include:
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Interest Rate Risk
The risk that a debt obligation's price will be adversely affected by increases in interest rates. |
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Credit Risk
The risk that the issuer of the debt obligation will fail to repay principal and interest. |
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Prepayment Risk
The risk that debt obligations, particularly mortgage-related securities, will be prepaid when interest rates are lower. |
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Guardian's Complete Product Portfolio
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RS Investments offers a comprehensive family of mutual funds for Investors with a wide range of risk and reward profiles.
These 23 managed funds provide your clients with a wide array of tools for effective asset allocation. More>>
Funds involve investment risks including possible loss of principal amount invested. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost.
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