Mutual Fund investing has several purposes. Some of these include diversification1, risk management, income, and growth. This page is designed to help you understand how mutual funds work and why they are important to your personalized investment program. As you develop your investment portfolio, your local Farm Bureau agent can work with you. Our agents can offer you their expertise and knowledge to help you meet your long-term goals.
We can also help you with retirement plans and education funding.
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Why Invest In Mutual Funds
Mutual Fund Frequently Asked Questions
What is a mutual fund?
How do you make money from a mutual fund?
What types of mutual funds are there?
What types of goals would I use mutual funds to accomplish?
How do I distinguish between the many different types of equity funds?
What are the costs of mutual fund investing?
What is a breakpoint?
What is Net Asset Value (NAV)?
What dollar amount is required to open a mutual fund account?
How do I select the mutual funds to invest in?
How do I know when to invest?
How can I get more information on mutual fund investing?
Understanding Size: Large Cap, Mid Cap, Small Cap
Growth versus Value Investments
Investing Internationally
Understanding Morningstar Ratings
1. Diversification: Simply put, this means don’t put all your eggs in one basket. Or, in the case of investing, don’t put all your money in one place. A mutual fund invests in dozens, even hundreds, of different securities that meet the fund’s objective. Owning a diverse mix of investments doesn’t eliminate risk, but it can reduce it as the ups and downs of individual securities may offset each other.1
2. Economies of Scale: Think buying in bulk. The more of the product you buy, the cheaper it becomes. This also occurs with the purchase and sale of securities, such as stocks. If you were to buy one stock at a time or a just a few, the transaction fees may be quite significant. Mutual funds, however, take advantage of their considerable buying and selling size, thereby reducing the transaction costs for investors. For example, if you determined you needed 15 to 20 stocks to be diversified, the transaction costs alone could eat a chunk of your investment. However, with mutual funds, you can make investments on a much larger scale for much less money.
3. Professional Management: The investments in a mutual fund are chosen by a professional who has experience and knowledge of the industry. Rather than having to carefully research every investment before you make the decision to buy or sell, the investment manager uses the considerable research at his/her disposal to make the buying/selling decisions for the fund.
4. Liquidity: Mutual Fund Investors can typically sell their shares at any time and receive the current Net Asset Value (NAV) of the shares.
5. Affordability: Some mutual funds accommodate individuals who want to invest, but do not have a large sum of money to invest, by setting low initial investment requirements, subsequent investment requirements, or both.
6. Dollar Cost Averaging: Mutual Funds allow you to purchase shares on a regular basis, such as, monthly or quarterly. Dollar cost averaging allows you to take advantage of fluctuating mutual fund prices. How this works is, when the price is low, your deposit purchases more shares than when the price is high. And when the price is high, that same deposit purchases fewer shares. This is dollar cost averaging. One of the results may be avoiding investing a large amount at the wrong time. It may also reduce the overall cost of the investment account. By purchasing shares over time at different price levels, the investor's average share price is lower than if they purchased the entire amount of shares at a higher price.
1Diversification does not guarantee a profit or protect against a loss.
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1. What is a mutual fund?
A mutual fund pools the money of many people and invests in stocks, bonds, and/or other investments. Each investor owns shares in this portfolio, which represents a portion of the holdings of the fund.
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2. How do you make money from a mutual fund?
Money is made from a mutual fund in 3 ways:
1. Dividends and Interest: A mutual fund typically pays out nearly all of the income it receives from the individual investments to the fund holders each year. Mutual Funds give the investor the choice to receive these distributions in cash or to purchase more shares (commonly called reinvesting).
2. Capital Gains: When the fund sells an investment that has increased in price, it has a capital gain. When it sells an investment that has decreased in price, it has a capital loss. Typically, the losses are subtracted from the gains, and the net gain (capital gains minus capital losses) is passed on to the shareholder each year. Mutual Funds give the investor the choice to receive these distributions in cash or to purchase more shares (commonly called reinvesting).
3. Capital Appreciation: This is when fund’s investments increase in value, but are not sold by the fund manager. This causes the fund’s shares to increase in price. When the investor sells these shares at a price higher than their purchase price, they will have a gain due to the capital appreciation. This type of gain is only realized when the investor sell his/her shares in the fund. Unlike, dividends and interest, and capital gains which are realized in the year they occur.
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3. What types of mutual funds are there?
Equity Funds (also known as stock funds): These funds invest in stocks and are the most common type of mutual fund. The objective of these funds is normally to provide the shareholder with long term capital growth.
Bond Funds (also known as income or fixed income funds): These funds invest primarily in government debt, corporate debt, or a combination of the two. While these funds may appreciate in value, usually the objective is to provide shareholders with consistent income.
Balanced Funds: These funds invest in a combination of stocks and bonds. Normally, their objective is to provide a mixture of safety, income and capital appreciation.
Global/International Funds: An international fund invests in foreign investments only. A Global investment invests in foreign and domestic investments. These funds may be in the form of stock or bond funds.
Specialty Funds: This type of fund tends to forgo diversification to focus on one segment of the economy. A couple examples of specialty funds include sector funds (which invest in one sector of the economy such as financial or health care) and regional funds (which invest in a particular region, such as China or Latin America).
Asset Allocation Funds: This type of fund invests in a variety of funds to attempt to achieve a certain asset allocation goal. There are several different types of Asset allocation Funds. For instance, generally a balanced fund implies a mix of stocks and bonds, such as 60% stocks and 40% bonds. Another type of asset allocation funds is a Life-cycle or target-date funds. These are often found in retirement plans, usually have a mix of stocks, bonds and cash equivalent securities. They start out with a higher risk-return position and gradually become less risky over time.
Index Funds (also known as Passively Managed Funds): Managers seek to track the performance of a particular index. The fund may buy and hold all of the securities in a particular index or a representative sample of that index. This type of fund is unlike actively managed funds, where a fund manager is attempting to outperform other funds or indices through their selection of securities.
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4. What type of goals would I use mutual funds to accomplish?
Mutual Funds can be used to accomplish many goals. Some of these include retirement, college funding, home purchase, and leisure activities, such as travel. No matter what the reason, your local Farm Bureau agent can offer you the products and services to help.
5. How do I distinguish between the many different types of equity funds?
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There are many different types of equity funds because there are many different types of stocks. To determine the type of equity fund, you can use the fund’s style box like the one illustrated below.
A style box uses the fund’s size and investment style to classify it. A value fund is one in which the manager invests in stocks which he/she feels are high quality, but out of favor with the market. A growth fund is one in which the manager invests in stocks which he/she feels have shown a strong potential for growth in areas such as earnings, sales and cash flow. A blend fund invests in a combination of growth and value funds.
For example, a mutual fund in the upper left hand corner would be a large cap value fund. This might be a large company who is in strong financial shape, but has recently seen a decline in their share price. In the opposite corner (lower right) we have small cap growth. An example of this type of fund would be a fund that invests in smaller companies, such as a start up firm with strong growth prospects.
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6. What are the costs of mutual fund investing?
1. Sales Charge (also known as a Load):
Front End Load: An upfront charge assessed for investing in the fund.
Back End Load (also known as Contingent Deferred Sales Charge): A fee you have to pay if you sell the fund within a specified time period, typically 7 years. The fee decreases each year and if you wait until after the 7th year, you will not have a fee if you sell the fund.
2. Expense Ratio: This is an annual charge that covers the expenses of running the fund. This fee is comprised of items such as management expenses, administrative costs, and marketing & distribution (12b-1) fees.
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7. What is a breakpoint?
Some mutual funds that charge a front end load will reduce the amount of the load for larger investments. The investment level needed to receive the reduced load will vary from company to company and are commonly referred to as breakpoints.
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8. What is Net Asset Value (NAV)?
The value of the fund’s underlying securities. It is calculated at the end of each trading day. When you sell a fund, it is redeemed at NAV.
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9. What dollar amount is required to open a mutual fund account?
This depends upon the fund and the fund family. However, many funds have low initial requirements, low subsequent investment requirements, or both. Contact your Farm Bureau agent for details regarding specific investment options.
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10. How do I select the mutual funds to invest in?
The first step is to determine your goal or goals and how long you have to accomplish these goals. Next, determine how much risk you are willing to take. This will allow you to eliminate funds that are too aggressive or too conservative for your situation. Finally, review the fund prospectus to ensure the fund's investment objective and risk line up with your goals. A Farm Bureau agent may be able to provide assistance with these steps. To find an agent in your area, click the link below.
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11. How do I know when to invest?
Anytime is a good time to invest in mutual funds. Mutual fund investing is not about “when.” The financial markets go up and down. No one can tell you with absolute certainty when the markets will go up and down, so no one call tell you with certainty when is the best time to invest in mutual funds. The important thing is to be invested and stay invested in assets that are appropriate for your risk tolerance and time horizon.
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12. How can I get more information on mutual fund investing?
Contact your Farm Bureau agent. If you don’t have a Farm Bureau agent, find one in your area below:
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Investing in companies of different sizes can be a way to benefit from diversification. Mutual funds can allow you to do that by offering funds that invest in companies of different sizes. The most common mutual fund “sizes” (also known as mutual fund capitalization) are Large Cap, Mid Cap, and Small Cap. This is a measure of the company’s size and total stock market value.
Each size has its pluses and minuses. Typically, smaller capitalization funds experience more volatility and, therefore, tend to be a riskier fund. However, they also often offer the best return potential because of this risk. Large caps on the other hand, tend to be less risky, but often have a smaller return potential.
The important thing to remember is that different sized companies react differently to the different phases of the economic cycle. Consequently, including mutual funds of varying sizes in your portfolio may help reduce the overall risk of your investments.
Large Cap: Typically, $11 to $16 Billion in capitalization
Mid Cap: Typically, $2.2 to 11 Billion in capitalization
Small Cap: Typically, $500 Million to $2.2 Billion
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Another way to diversify your portfolio is to diversify by style. There are two types of investment styles, “growth” and “value.” These assets can perform differently during different market climates. Investing in both growth and value investments can be a way to add diversification to your portfolio.
A growth mutual fund manager tends to invest in companies that he/she believes has the ability to achieve growth of earnings in the long run. Growth stocks tend to be more risky than value.
A value mutual fund manager tends to invest in companies that he/she feels are trading at a price that is lower than what they are actually worth. The risk with these funds is that the market may not realize that the security is undervalued and it may not appreciate as expected.
A blend fund invests in both growth and value securities.
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International investing is becoming more prevalent as the economies of the world become more globalized. It no longer means investing in a company you have never heard of or in countries that you know little about. Today, some of the biggest brands are international. Think Toyota or Sony.
Today the international financial markets continue to grow and become more accessible to investors. One reason that you may want to consider international investing is that it may help reduce overall portfolio risk. The reason for this is that global economies do not necessarily move at the same time as the US economy. Including these investments in your portfolio may increase your level of diversification.
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Investors sometimes refer to Morningstar ratings as a gauge of how a fund has performed. Morningstar rates mutual funds from one to five stars based on how well they've performed (after adjusting for risk and accounting for all sales charges) in comparison to similar funds.
Based upon a variety of factors, Morningstar assigns a rating to each fund. These ratings are a useful tool for identifying funds worthy of further research, but shouldn't be considered as buy or sell recommendations.
Within each Morningstar Category:
The top 10% of funds receive five stars
The next 22.5% four stars
The middle 35% three stars
The next 22.5% two stars
The bottom 10% receive one star
Funds are rated for 3, 5, and 10 year periods. These ratings are combined to produce an overall rating. Funds with less than three years of history are not rated. The ratings are objective, based entirely on a mathematical evaluation of past performance.
For more information on Morningstar ratings, you can visit www.morningstar.com.
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Farm Bureau agents proudly offer the following fund families:
American Funds
EquiTrust Mutual Funds
Fidelity Investments
Franklin Templeton Investments
J.P. Morgan Asset Management
Lord Abbett
OppenheimerFunds
PIMCO
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