What are mutual funds?

The fund’s investment adviser manages the fund and invests in securities that meet the fund’s investment objective, including:

• Stocks — Shares of a company sold to fund business growth. When you buy a stock, you own a part of the company. Historically, stocks have shown strong potential to grow in value. Stocks also have potential to lose value.
• Bonds — A loan agreement between the issuer — typically a company or government entity — and the buyer. If you buy a bond, the issuer usually agrees to pay you interest for a certain length of time and to return your principal. Bonds tend to be more stable than stocks, but they are not without risk.
• Cash equivalents — Investments such as money market securities, certificates of deposit and U.S. Treasury bills. They’re called cash equivalents because they’re liquid investments that carry less risk than stocks or bonds.

There are many advantages to mutual funds, including:

• Professional management — Managing investments requires a commitment of time, resources, experience and knowledge that most individuals don’t have. Mutual funds have investment advisers, which typically include professionals such as portfolio managers and investment analysts who do research on their shareholders’ behalf. These professionals study companies full-time by reading reports and dissecting balance sheets.
• Diversification — In a mutual fund, your money is invested in dozens or even hundreds of securities covering different industries that meet the fund’s objective. It would be difficult for an individual to own a portfolio that matches the diversification you’d find in a mutual fund. Owning a diverse mix of securities doesn’t eliminate risk, but it can reduce it because the ups and downs of individual securities can offset each other.
• Convenience — Shareholders can sell their shares on any business day. This feature becomes important when you begin to withdraw your money in retirement.